Business Models and Strategy for Sustained Competitive ... · 5 1.1.2 The Theoretical Domain of the...

MSc in Economics and Business Administration Department of Marketing

Integrating Business Models and Strategy for Sustained Competitive Advantage

- A Case Study of Ryanair

Master Thesis delivered to Copenhagen Business School , Oktober 2010

Caroline Ramos Korsaa Cand.Merc. SMC

Lisbet Røge Jensen Cand.Merc. MIB

Supervisor: Claus J. Varnes , Department of Operation Management

Characters: 257.414 Total pages 106 (exclusive of appendices)

Abstract This thesis studies the business model as a possible integrator of different strategic

perspectives on firms‟ sustained competitive advantage. It presents the arguments for viewing

the business model as a concept closely related to strategy in general and competitive

advantage in particular. Furthermore, it reviews existing business model literature in order to

determine how this field can contribute to our understanding of sustained competitive

advantage.

Despite the increase of interest in the term business model by academics and managers, no

common definition has yet been accepted by the business community (Shafer et al., 2005). On

one hand, Porter (2001) argues that the talk about business models has substituted the talk

about strategy and competitive advantage and that the business model approach to

management is an “invitation for faulty thinking and self-delusion” (p.73). On the other hand,

the study conducted in this thesis and the review of existing business model literature show

that the business model can in fact be integrated with strategy in order to create a wider

understanding of a firm‟s sustained competitive advantage.

Hence, based on a theoretical framework, this thesis proposes a business model which

integrates components from both Industrial Organization and the Resource-Based View of the

firm as well as components from the business model literature. In addition, the business

model proposition is based on the hypothesis that the sustainability of competitive advantage

depends on a strategic fit, which is argued to be a function of competitive advantage and the

degree of coupling between the business model components. In order to test the business

model proposition and hypothesis, an empirical investigation of the Irish airline and industry

leader Ryanair is conducted.

The conclusion of the study carried out in this thesis is, that including important elements

from different perspectives allows for a greater complexity when evaluating firm

performance. This complexity comes from the wider scope of analysis which is a result of

working with the several components included in the business model proposition. Working

with these components makes it possible to pull apart aspects of the firm in order to look

closely at the firm‟s fundamental functions and this, in turn, enhances our understanding of

sustained competitive advantage.

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Table of Contents

Chapter 1: Introduction & Problem Statement .......................................... 4

1.1 INTRODUCTION ........................................................................................................ 4

1.1.1 Murky Definitions and Faulty Thinking ....................................................... 4

1.1.2 The Theoretical Domain of the Business Model Concept ............................ 5

1.2 PROBLEM STATEMENT ............................................................................................. 6

1.3 RESEARCH STRATEGY ............................................................................................. 6

1.3.1 Methodology and Philosophy ....................................................................... 6

1.3.2 Information Gathering ................................................................................. 9

1.3.3 Organization of the Thesis ......................................................................... 11

Chapter 2: Theoretical Framework .......................................................... 12

2.1 PART I: COMPETITIVE ADVANTAGE ....................................................................... 12

2.1.1 Historical Context ...................................................................................... 12

2.1.2 I/O and Competitive Advantage ................................................................. 13

2.1.2.1 Limitations of I/O ........................................................................................... 14

2.1.3 RBV and Competitive Advantage ............................................................... 14

2.1.3.1 Limitations of the RBV .................................................................................. 17

2.1.4 Conclusion part I ........................................................................................ 17

2.2 PART II: BUSINESS MODEL LITERATURE REVIEW ................................................. 18

2.2.1 Emergence and Meaning of the Term “Business Model”.......................... 18

2.2.1.1 Business Model Definitions ........................................................................... 19

2.2.1.2 Business Model Components ......................................................................... 20

2.2.2 Issues Raised in Relation to Competitive Advantage ................................. 22

2.2.2.1 Business Model and Strategy ......................................................................... 23

2.2.2.3 Business Model Successfulness ..................................................................... 27

2.2.3 Theoretical Overview of Business Model literature ................................... 31

2.2.4 Conclusion part II ...................................................................................... 37

Chapter 3: Business Model Proposition ................................................... 39

3.1 INTEGRATION OF STRATEGY AND BUSINESS MODEL ............................................. 39

3.2 PROPOSITION ......................................................................................................... 42

3.2.1 Contribution from Strategy ........................................................................ 43

3.2.2 Contribution from the Business Model literature ...................................... 45

3.2.3 Integration of section 3.2.1 and section 3.2.2 for Sustained Competitive

Advantage ............................................................................................................ 48

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Chapter 4: Ryanair Case Study ................................................................ 51

4.1 DESCRIPTION OF CASE COMPANY ......................................................................... 51

4.1.1 Initial efforts as a low-cost airline ............................................................. 51

4.1.2 Re-Launching Ryanair as a „Low-Fares, „No Frills‟ Operation ............... 51

4.2 APPLYING THE BUSINESS MODEL PROPOSITION .................................................... 53

4.2.1 Components from I/O ................................................................................. 54

4.2.2 Components from RBV ............................................................................... 63

4.2.3 Components from the Business Model literature ....................................... 73

4.2.5 Performance of Ryanair‟s Business Model ................................................ 92

Chapter 5: Conclusion and Discussion .................................................... 96

5.1 CONCLUSION ......................................................................................................... 96

5.2 DISCUSSION OF FINDINGS AND DIRECTIONS FOR FURTHER RESEARCH .................. 98

6. Bibliography ......................................................................................... 99

6.1 JOURNAL ARTICLES AND BOOKS ........................................................................... 99

6.2 REPORTS AND OTHER PUBLICATIONS .................................................................. 102

6.3 NEWS ARTICLES – PRINT AND ONLINE ................................................................ 102

6.4 OTHER ONLINE RESOURCES ................................................................................ 105

6.5 INTERVIEWS......................................................................................................... 106

7. Appendices ......................................................................................... 107

APPENDIX 1: OVERVIEW OF RYANAIR‟S PARTNERS .................................................. 107

APPENDIX 2: RYANAIR‟S WEBSITE ............................................................................ 111

APPENDIX 3: INTERVIEW GUIDE ................................................................................ 112

APPENDIX 4: TRANSCRIPTION OF INTERVIEW WITH JACOB PEDERSEN, CFA SENIOR

ANALYST FROM SYDBANK/DENMARK ...................................................................... 119

APPENDIX 5: TRANSCRIPTION OF INTERVIEW WITH PER HVID, HEAD OF FOREIGN

EQUITIES FROM SVENSKA HANDELSBANKEN/DENMARK .......................................... 125

APPENDIX 6: TRANSCRIPTION OF INTERVIEW WITH JOE GILL, DIRECTOR OF EQUITY

RESEARCH WITH BLOXHAM STOCKBROKERS/IRELAND ........................................... 130

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Chapter 1: Introduction & Problem Statement

1.1 Introduction

This thesis is a study of business models. More specifically, it studies the business model as a

possible integrator of two strategic perspectives on firms‟ competitive advantage which differ

in their basic assumptions, namely Industrial Organization (I/O) and the Resource-Based

View (RBV) of the firm. On one hand, the I/O school of thought is based on the assumptions

that firm resources are homogeneous and highly mobile in the market (Porter, 1981). On the

other hand, the RBV is based on the idea that firms are fundamentally heterogeneous

regarding their resources and internal competencies (Barney, 1991). This first chapter

introduces the subject and the arguments for viewing business models as a concept closely

related to strategy in general and the question of firms‟ competitive advantage in particular.

Following the introduction, the problem statement of the thesis is presented together with the

research questions used for structuring the study. The final section of chapter 1 introduces the

research strategy and includes the methodology, philosophy, and organization of the thesis.

1.1.1 Murky Definitions and Faulty Thinking

”The definition of a business model is murky at best. Most often, it seems to refer to a

loose conception of how a company does business and generates revenue. … The

business model approach to management becomes an invitation for faulty thinking

and self-delusion.” (Porter, 2001, p. 73)

In 2001, Michael Porter argued that the talk about business models has substituted the talk

about strategy and competitive advantage (Porter, 2001). In the context of doing online

business he accused Internet companies for a misguided approach to competition and for

embedding it in the language used to discuss it. Hence, the vague definition and conception of

the term “business model” have unfortunate consequences, such as leading to simplistic

strategic approaches and failure to harness important competitive advantages.

It seems though, that the business model concept has moved far beyond business on the

Internet, and several authors contributing to the business model literature recognize a close

relation with the theoretical field of strategy. In the following, we present some of the

arguments found in the business model literature for viewing business models as a concept

closely related to strategy and the theoretical perspectives within that field.

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1.1.2 The Theoretical Domain of the Business Model Concept

“Admittedly, the topic of business models led to a lot of publications by journalists,

business people, consultants and academics. It is discussed in various different

domains, such as e-business, information systems, strategy, and management [Pateli

and Giaglis 2003].” (Osterwalder & Pigneur, 2005, p. 3)

As the quotation above indicates, the concept of the business model is found in diverse fields

of literature, both academic and managerial. The business model term is particularly popular

within research on e-business (Hedman & Kalling, 2003). It is, however, more sparsely used

within strategy research even if this area covers many of the theoretical components included

in the business model concept (ibid). In fact, attempts to separate the concept from the field of

strategy have proven quite difficult (Mäkinen & Seppänen, 2007). Morris et al. (2005) also

argue that the concept of the business model lies within the field of business strategy. The

construct builds upon central ideas in business strategy and associated theoretical traditions.

Most directly, it builds upon Porter‟s concepts of the value chain, value systems, and strategic

positioning from 1985 and 1996, respectively. Furthermore, the business model construct

draws on resource-based theory, strategic network theory and cooperative strategies and it

also relates to choices of firm boundaries as well as transaction cost economics.

Zott & Amit (2007) place business model research at the intersection of organization theory,

entrepreneurship, and strategy while Mansfield & Fourie (2004) present the business model as

a contingency model, which describes linkages between a firm‟s resources, functions, and

environment. They place the concept in a setting of both Porter‟s position-based view on

strategy and the RBV.

As the business model literature directs, the two strategic perspectives of I/O (primarily the

works of Michael E. Porter) and the RBV are particularly relevant when studying business

models. Although these two perspectives conflict in their basic assumptions (Barney, 1991),

the business model concept has promise to integrate them because it unites “the finer aspects

of strategy, such as resource-bases, activities, structure, products and external factors”

(Hedman & Kalling, 2003, p. 49). And while differing in assumptions, both Porter‟s

environmental models and the RBV focus on analyzing and understanding the sources of

competitive advantage, and both perspectives ask how a firm can create and sustain

competitive advantage (Porter, 1985; Barney, 1991).

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1.2 Problem Statement

So, with this relation between the theoretical fields of the business model and strategy in mind

and the view of the business model as a possible integrator of two, apparently conflicting,

strategic perspectives, we are lead to the following problem statement:

How can the business model be integrated with traditional strategic perspectives in order to

better understand a firm's sustained competitive advantage?

This main problem can be investigated through the following research questions:

Research questions

1) Traditional strategic perspectives concerned with how firms create and sustain

competitive advantage are Industrial Organization (I/O) and the Resource-Based View of

the firm (RBV). What are the views on competitive advantage within each of these

perspectives and which limitations exist?

2) How does the business model literature contribute to the discussion about sustained

competitive advantage?

3) Based on theoretical insights from research questions 1 and 2, how can traditional views

on competitive advantage be integrated with contributions from the business model

literature into a business model proposition?

4) How can the business model proposition be empirically tested in order to confirm or

reject our hypothesis of what leads to a firm's sustained competitive advantage?

1.3 Research Strategy

Based on the research questions above, the overall structure of this thesis is to develop a

theoretical framework, which then serves as a basis for deducting a hypothesis in the form of

a business model proposition having as its purpose to lead to the creation of sustained

competitive advantage. This proposition is then empirically tested and, finally, the main

question answered. In the following, we explain our chosen methodology and the philosophy

behind it. We also account for the information gathering as it relates to both the applied

literature and empirical data. The organization of the thesis is mapped out in the last section

of the chapter.

1.3.1 Methodology and Philosophy

As indicated by research questions 1 and 2, the theoretical framework is based on two parts:

The first part concerns the traditional views on competitive advantage as it reviews the

strategic perspectives I/O and the RBV of the firm. More specifically, we rely primarily on

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the contributions of Porter (1985; 1996; 2001), Barney (1991), and Hamel & Prahalad (1994).

The reason why we have chosen this theoretical base is that these two perspectives, i.e. I/O

and the RBV, are both specifically concerned with the question of how a firm can create and

sustain competitive advantage (Porter 1985; Barney 1991). Other strategic perspectives would

undoubtedly be relevant in other contexts, but since competitive advantage is the purpose of

the proposed model, we consider it appropriate to create consistency between the purpose of

the model and the applied theoretical foundation.

The second part of the theoretical framework concerns the business model and is a review of

the existing literature. Texts in this review are selected according to our judgment of their

relevance to the issue of competitive advantage. While our journey into the theoretical field of

the business model quickly revealed a lack of coherence and theoretical anchoring, there

seems to be agreement on the fact that the phenomenon is closely attached to the fields of

strategy. The business model is mentioned in many and diverse domains, such as e-business,

information systems, and management (Osterwalder & Pigneur, 2005), however, attempts to

separate the phenomenon from strategy has proven quite difficult (Mäkinen & Seppänen,

2007). To narrow down the vast amount of material on the subject and to focus on our

research area, we have identified similarities in research methods and issues already raised in

the literature. These similarities and issues raised are then taken as the main drivers of our

literature selection and review.

With the purpose of answering research question 3, we then discuss this theoretical

framework. Inspired by several business model authors (e.g. Hedman & Kalling, 2003) we

adopt an integrative method, which considers the business model as a promising phenomenon

in the sense that it can integrate disparate strategic perspectives such as I/O and the RBV

(Hedman & Kalling, 2003). In the context of this thesis, the discussion leads us to deduct a

hypothesis from the theoretical framework, which concerns how existing views on

competitive advantage can be integrated with insights from the relatively new literature on the

business model. The hypothesis takes the form of a business model proposition which

requires a strategic fit between several specific components in order to lead a firm to


To answer the last research question, this theoretically deducted hypothesis is then tested on

the case of Irish airline Ryanair, which we, with a high degree of certainty, can determine as

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leader of its industry. With this case analysis we want to be able to confirm or reject our

hypothesis as stated above. Testing it on a company that we know is industry-leader lets us

have a “check-point”, as we know that we must somehow be able to determine what makes

the company successful. The result of this empirical investigation was a confirmation of our

hypothesis as we were in fact able to point out a connection between the components in our

business model proposition and also a mutually reinforcing relationship between these. Had

we found out that some components had been superfluous or irrelevant, we would have

rejected our hypothesis, but this seemed not to be the case. On the other hand, we have to

accept the uncertainty that there could be additional relevant elements, which we have not

taken into consideration.

Whether this confirmation of our business model proposition is enough to conclude that it is

true or false, is a question of research philosophy. While we recognize that we are standing on

the shoulders of giants as it relates to the development of the theoretical framework of this

thesis, we are humble enough to accept that we, as well as the authors applied, can be wrong.

Only through continuous experimentation and observation, and through a discussion based on

various viewpoints it is possible to come closer to the objective truth. In this sense, we accept

Karl Poppers critical rationalism (Gilje & Grimen, 2002), and the notion that only

falsification, not verification (as proposed by the positivists), can determine whether the

proposed knowledge can be classified as the objective truth. The implication of accepting

Popper‟s critical rationalism is that we need to accept that no matter how many case studies

we made to test our hypothesis, having positive outcomes, it would not be enough to

eliminate the insecurity of our possible wrong-being. However, as long as the proposition, i.e.

the hypothesis, has not been falsified, we can categorize it as a qualified guess. Qualified in

the sense that it builds on existing theories which have also been exposed to testing. Hence,

we view our thesis as more of an attempt to contribute to the scientific advance in the

studying of firms‟ competitive advantage than as an attempt to reach a conclusion of the

objective truth in this question. A way to further advance in this area is to repeat the empirical

experiments until falsification is achieved and assumptions then must be reviewed. For

example, market leaders in other industries could be investigated to see if there were

conditions that deviated from those of Ryanair‟s.

This leads us to discuss our choice of a single-case study. Including more than one case, we

would have increased our possibility of falsifying the proposed business model and

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hypothesis. However, the amount of data needed in order to perform the investigation places

this option beyond the scope of this thesis as regards time and space. Furthermore, the amount

of cases in a study like this, is not as important as the choice of cases (Eisenhardt, 1989). Our

case has been chosen for theoretical, not statistical, reasons. As mentioned before, we have

chosen a case that represents a polar type (ibid), i.e. Ryanair as the industry leader. This

makes the subject of interest (in our case: competitive advantage) “transparently observable”

(Eisenhardt, 1989, p. 537), which is preferable when testing emergent theory via case studies.

1.3.2 Information Gathering

This section describes our choice of business model literature and our process of gathering

empirical data. We will not go into a detailed account of the theories of competitive

advantage, as this is covered by the first part of chapter 2.

Business Model Literature

Our quest into the domain of the business model literature began with a Google search and a

search in Business Source Complete which returned 14,100,100 and 8,874 results,

respectively. We narrowed this down to a rough list of 55 articles that we reviewed in order to

get to the core of the business model literature and identify a relevant context for this study.

Throughout our continuous efforts, this rough list eventually ended up as an exclusive sample

of the business model literature consisting of 22 articles, which are all summarized in table

2.2. In the literature review performed in chapter 2, part II, it is the views and arguments of

these authors that are presented and applied. Other authors may be referred to in other parts of

the study, but their contributions are then only used for descriptive, not analytical, purposes.

Empirical Data

The empirical data gathered for this thesis is used for the case study of Ryanair. In the

following, we explain how we have employed the case study as an all-encompassing research

strategy covering design, data collection, and analysis (Yin, 2003). Our research design is

built around the questions (main and research questions) that this thesis studies and the

business model proposition made. The unit of analysis is Ryanair and more specifically

Ryanair‟s business model. Our theoretical framework developed in the first part of the thesis

is what enables us to gather relevant data on one hand and to analyze the results of the case

study on the other hand. Furthermore, the framework has been determining for the interview

guides developed. We have used data triangulation (Yin 2003) as a principle for collecting

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evidence for the case study. This entails the use of multiple sources of evidence with the

purpose of confirming the same fact or phenomenon observed, and applying this principle

enhances the likelihood of convincing and accurate findings and conclusions (ibid).

More specifically, the information gathering for the empirical testing of our business model

proposition is characterized by primary data in the form of interviews with industry analysts

and complemented with data collected from articles, books, web-sites and reports. As

interviews are argued to be an essential source of case study information (Yin, 2003), we

provide a thorough description of this data source below.

Our three interviews were carried out with specialists working with the key metrics behind

Ryanair‟s competitive position as well as the airline industry in general. By conducting three

interviews with different specialists, we obtain a broad perspective. However, in our search

for interviews with Irish and English analysts, we were met with an unwillingness to be

quoted and many simply refuse to spend time on school projects. As compensation, Morgan

Stanley and Citigroup Global Markets provided us with financial reports on Ryanair. It

should also be noted that Ryanair upholds a policy of not giving interviews to students.

The first interview was conducted with Jacob Pedersen, CFA senior analyst from Sydbank¸

who is often interviewed on the news and in other media concerning the airline industry. He

follows Ryanair and their competitors closely, as forecasts are made based on his analysis.

The second interview was conducted with Per Hvid, Head of foreign equities from Svenska

Handelsbanken. Unlike Jacob, his perspective is that of a stock broker and serves as a liaison

between investors and the stock market. Accordingly, he buys, sells and trade stocks for

investors based on his own forecast and the input he gets from analysts.

The final interview was conducted with Joe Gill, Director of Equity Research with Bloxham

Stockbrokers. Since Ryanair is an Irish airline an interview with Ireland‟s largest independent

stockbroker (bloxhams.ie/we) was important in order to get as close to the company as

possible. On Ryanair‟s website, Joe Gill is referred to as an analyst who “actively publish

research on the key driver and metrics behind Ryanair‟s success” (Ryanair.com/da/investor/

analyst-coverage). Accordingly, Joe Gill works in close relation with Ryanair, and as Ryanair

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does not make interviews for the purpose of school projects, Joe Gill is the closest we can get

to an interview with the management.

Additional sources of information include:

- Documentation (Yin, 2003) in the form of:

o Written reports from Ryanair, e.g. briefs on the company strategy

o Formal case studies of the same company carried out by other researchers in

journal articles, books, and reports

o Newspaper articles

- Archival records (Yin, 2003)

o Annual reports and budgets

o Service records, e.g. lists of passengers served etc.

o Survey data collected about Ryanair by other researchers, industry

organizations, etc.

Information gathered from these sources has been carefully evaluated, as have the actual

sources. Hence, information from e.g. special interest groups (ELFAA, ITF), which could be

argued to be biased in their evaluation of industry conditions, is not allowed to stand on its

own, but is carefully held up against other sources to confirm or reject their accuracy.

1.3.3 Organization of the Thesis

The last part of this chapter describes how the rest of the thesis is structured. The study is

organized according to the four research questions posed to substantiate the problem

statement. Each chapter in the study has as its purpose to answer a research question, with

each part then contributing to the final conclusion and answer to the main question. Hence,

chapter 2 deals with research questions one and two, which make up the theoretical

framework of the study. Then follows chapter 3, which answers research question 3 and is the

business model proposition deducted from the theory applied in chapter 2. As a final element

of the study, chapter 4 is structured to answer research question four and, hence, conducts the

empirical investigation based upon the business model proposition presented in chapter 3. In

the end comes our final conclusion and answer to the main question together with reflections

about the findings from the study.

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Chapter 2: Theoretical Framework

The aim of this chapter is two-fold as it seeks to discover, firstly, which views and limitations

exist in the traditional strategic perspectives concerned with creating and sustaining

competitive advantage, and, secondly, which contributions the literature on business models

has to offer that may enhance our current understanding of competitive advantage. These are

the two issues raised in research questions 1 and 2. Hence, the chapter is divided into two

parts, which seek to answer each of these questions. Separate conclusions are made to the two

parts of this chapter, and together these conclusions form the theoretical framework and basis

for the discussion, which opens chapter 3 and leads to our business model proposition.

2.1 Part I: Competitive Advantage

This part of chapter 2 has the purpose of answering the first research question of the study:

Existing strategic perspectives concerned with how firms create and sustain

competitive advantage are Industrial Organization (I/O) and the Resource-Based

View of the firm (RBV). What are the views on competitive advantage within each of

these perspectives and which limitations exist?

We begin with a brief historical introduction to the two strategic perspectives and then move

on to describing each of the perspectives as it regards their position on what constitutes

competitive advantage. We also look at the critique raised of each perspective and their

limitations. Finally, we present our conclusion to the research question, and this forms the

first part of our theoretical framework which is applied in later chapters of the study.

2.1.1 Historical Context

”Since at least 1911, scholars have tried to answer the question „Why do some firms

persistently outperform others?‟” (Barney & Arikan, 2001, p. 124)

Strategic management deals with this question from a managerial perspective and tries to

explain the sources of sustained competitive advantage. Strategic management has, however,

changed dramatically since its starting point in the 1950ies, when Selznick introduced the

need to bring an organization‟s „internal state‟ and „external expectations‟ together for

implementing policy into the organization‟s social structure (Kong, 2008). This perspective

was later further developed in 1982 by Weihrich who conceptualized the internal and external

analysis into a structured matrix known as the SWOT framework (ibid). This model provides

information in order to match the firm‟s internal Strengths and Weaknesses with the external

Opportunities and Threats.

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As strategic management has continued to change, the SWOT framework has been split into

two separate schools of strategy. The first school of strategy is the I/O school of thought,

which is represented by the opportunities and threats and the second school of thought is the

RBV of the firm represented by the strengths and weaknesses (ibid).

2.1.2 I/O and Competitive Advantage

The dominant school of thought in strategic management has been the I/O, where the

relationship between the firm and the industry is essential. A principal model of this school

has been Michael Porter‟s (1985) “five competitive forces” for analyzing industry structures.

In this model, a firm‟s profitability is influenced by its relative size compared to its industry

rivals, suppliers and customers (Porter, 1985). Accordingly, the industry forces in which the

firm operates requires that the firm adapts to these requirements in order to survive in the long

run. In addition, the firms that fail to adapt to these requirements will be forced to exit from

the industry/market.

The models within the I/O school of thought are based on the following two assumptions:

firstly, companies in an industry are identical in terms of the strategically relevant resources

they control and the strategies they pursue (Porter, 1981). Secondly, resources in an industry

are identical because an organization‟s resources, which they use to implement strategies are

highly mobile in the market (Barney, 1991). Moreover, within the I/O school of thought the

key to sustained competitive advantage is choosing an appropriate industry and positioning

itself within that industry.

Consequently, the I/O paradigm regards competitive advantage as a position of superior

performance that a firm can achieve through one of the following generic strategies: cost

leadership, differentiation or focus (Porter, 1985). Cost leadership is the achievement of the

lowest unit cost base of the industry, whereas differentiation is the ability to charge a

premium price for offering some perceived added value to the customer (Porter, 1985). The

focus strategy is the concentration of a narrow segment and within that segment attempt to

achieve either a cost advantage or differentiation (Porter, 1985).

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2.1.2.1 Limitations of I/O

In the context of today‟s rapidly changing environment, the static framework within the I/O

school of thought is being tested and questioned, as an unknown company can take over the

market leader position over night (Tidd et al. 2005). Consequently, many scholars have begun

to look beyond the I/O school of thought in order to better understand the sources of sustained

competitive advantage.

In addition, proponents of the RBV (Teece et al., 1997; Hamel & Prahalad, 1994) argue that

the structural approach represented by Porter‟s competitive forces framework is obsolete as

the competitive environment has changed dramatically since the mid 1980‟s.

Moreover, Barney contradicts Porter‟s central principle of industry attractiveness, i.e. that

superior firm performance is a result of excellent entrance and operation in attractive product

markets. Barney argues that “if strategic factor markets are perfectly competitive, even if

firms are successful in implementing strategies that create imperfect competitive product

markets, those strategies will not be a source of economic rents” (Barney & Arikan, 2001).

Accordingly, theories of imperfect product market competition are not sufficient for the

development of a theory of economic rents. As a result, Barney & Arikan (ibid) suggest that

economic rents can be obtained through the resources, which a firm controls. He argues that

firm specific resources, as opposed to resources acquired elsewhere, are more likely to lead to

economic rents because these were acquired or developed in a previous strategic factor

market where their price was a function of the expected value of those resources in that

market (Barney & Arikan, 2001).

2.1.3 RBV and Competitive Advantage

The RBV emerged as a complement or dual to Porter‟s theory of competitive advantage

(Barney & Arikan, 2001). Initially, Wernerfelt (1984) developed a theory of competitive

advantage based on the resources a firm develops or acquires to implement product market

strategy. Wernerfelt‟s (1984) primary contribution to the RBV literature was recognizing that

firm specific resources as well as competition among firms based on their resources can be

essential in order for organizations to gain advantages in implementing product market

strategies (Barney & Arikan, 2001). A different perspective is presented by Rumelt (1984)

who focuses on economic rents and created a theory of rent generation and appropriating

characteristics of firms (Barney & Arikan, 2001). Moreover, Rumelt (1984) in his strategic

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theory offered many characteristics which were later associated with the RBV. For example

his view on “firms as collections of productive resources” as well as his suggestion that the

imitability of these resources depends on the extent to which they are protected by an

“isolation mechanism” (Barney & Arikan, 2001). The third resource-based article in the field

of strategic management was published by Barney in 1986. Barney introduced the concept of

strategic factor markets as the market where firms acquire or develop the resources they need

to implement in their product market strategies. As a result, Wernerfelt (1984), Rumelt (1984)

and Barney (1986) are the three corner stone‟s of what was later known as the resource-based

theory.

In the mean time, while resource-based theory was developing, a parallel stream of “resource-

based” work was being developed in the area of competitive advantage (Barney & Arikan,

2001). The most significant contributors of this parallel stream is Itami (1987), Prahalad and

Bettis (1986) and Prahalad and Hamel (1990).

Itami‟s (1987) theory of invisible assets suggests that invisible assets, e.g. information-based

resources such as technology, customer trust, brand image, control of distribution, corporate

culture, and management skills are necessary for competitive success. Accordingly, invisible

assets are the real source of competitive advantage because they are hard and time-consuming

to accumulate. Further, they can be used in multiple ways simultaneously, and are inputs and

outputs of business activity. Itami (1987) continues to argue that people are both

accumulators and producers of invisible assets. Visible assets, on the other hand, must be

present for business operations to take place, but it is the invisible assets that lead to


Prahalad and his colleagues (Prahalad and Bettis, 1986; Prahalad and Hamel, 1990) developed

an approach to understanding corporate diversification. Differing from previous corporate

strategy work which had been focusing on the importance of shared tangible assets across

businesses, Prahalad began emphasizing the potential importance of sharing intangible assets

across businesses. These shared intangible assets were called “a firm‟s dominant logic”

(Prahalad and Bettis, 1986). The concept of a dominant logic led to the very influential paper

that defined the notion of a corporation‟s “core competence” A core competence is defined as:

16

“the collective learning in the organization, especially how to coordinate

diverse production skills and integrate multiple streams of technologies.”

(Prahalad and Hamel, 1990, p.82)

Consequently, the work of Itami (1987), Prahalad and Bettis (1986) and Prahalad and Hamel

(1990) has had a great impact on the development of the RBV. In fact resource-based theories

of corporate diversification has been one of the most popular ways to empirically test

resource-based logic (Barney and Arikan, 2001).

Moreover, resource-based theory is based on the assumption that firms are fundamentally

heterogeneous regarding their resources and internal competencies. It deals with the problem

of how firms can exploit their internal resource base and capabilities to obtain sustained

competitive advantages (Barney, 1991; Hamel & Prahalad, 1994).

According to Barney (1991), a firm is argued to have a competitive advantage when it is

implementing a value creating strategy which a current or potential competitor is not

implementing at the same time. Moreover, a firm is argued to have a sustained competitive

advantage when it is implementing a value creating strategy which a current or potential

competitor is not implementing at the same time and when these other firms are unable to

duplicate the benefits of this strategy (Barney, 1991). However, in order for a resource to have

the potential of being a sustained competitive advantage, it must contain the following four

attributes: Firstly, it must be valuable, in the sense that it exploits opportunities and/or

neutralizes threats in a firm‟s environment, secondly, it must be rare among firm‟s current and

potential competition; thirdly, it must be imperfectly imitable and fourthly, there cannot be

any strategically equivalent substitutes for this resource that are valuable but neither rare or

imperfectly imitable (Barney, 1991).

Whereas Barney focuses on internal resources as the key to sustained competitive advantage,

Hamel & Prahalad (1994) focus on core competencies and argue that a firm‟s sustained

competitive advantage is to be found in its core competencies. In order for a competence to be

a core competence, three criteria have to be met: the competence has to 1) provide access to

more than one market, 2) give a significant contribution to the end product/products and 3) be

difficult for competitors to imitate (Hamel & Prahalad, 1994). Accordingly, if a company

possesses a core competence and understands how to take advantage of it, it can lead to

sustained competitive advantages.

17

2.1.3.1 Limitations of the RBV

Focusing only on the internal resources or core competence of the firm can limit the reach for

learning new competencies. Hence, core competencies can also become „core rigidities‟ in the

firm, when established competencies become too dominant” (Tidd et al., 2005).

Moreover, Hedman & Kalling (2003) criticize the RBV as well as the I/O perspectives for

neglecting the obstacles to strategic dynamics and managements (Hedman & Kalling, 2003).

This view is supported by Chan et al. (2004) who criticize both perspectives for their implicit

assumption of static equilibrium. As a result, Teece et al. (1997) argue that in a dynamic

environment, the dynamic capabilities perspective adds a new framework where focus is on

the ability to manage talent, creativity, expertise, relationships and technology in a global and

rapidly changing business landscape. The success of the organization is dependent on its

ability to identify market opportunities, and to organize processes to respond to these

opportunities. As a result, the ability to coordinate resources and capabilities becomes a

competitive parameter for organizations in order to create competitive advantages. However,

the capabilities that a firm possesses and can produce in the future are path dependent, and

cannot be changed quickly. Accordingly, competitive advantages stem from developing

current capabilities that are highly effective in responding to the organization‟s environment;

yet, some firms are not able to replicate those capabilities quickly (Davenport et al., 2006).

2.1.4 Conclusion part I

Since its starting point strategic management has been divided into two dominant schools of

strategy, namely the I/O and the RBV. On one hand, the I/O school of thought regards firm

resources as being homogeneous and therefore they see the concept of competitive advantage

as being ascribed to external characteristics. On the other hand, the RBV is based on the idea

that firm resources are heterogeneous, and therefore views competitive advantage from the

perspective of the distinctive competencies and resources that give a firm an edge over its

competitors.

In spite of the dominance of I/O and the RBV as separate schools of thought, both

perspectives contain limitations. Core competencies can become „core rigidities‟ in the firm if

established competencies become to dominant. Accordingly, one theoretical deficiency within

the RBV as well as in the I/O schools of thought is their implicit assumption of static

equilibrium (Chan et al., 2004), without addressing the requirements for continued success in

18

a volatile and dynamic environment. Moreover, both schools of thought are argued to be

insufficient when applied on its own. When focusing only at the industry/firm level or only at

the resource level, the firm will be missing out important insights from each theoretical

perspective.

2.2 Part II: Business Model Literature Review

This second part of chapter 2 seeks to answer research question 2:

How does the business model literature contribute to the discussion about sustained

competitive advantage?

In order to answer the research question, we conduct a literature review. To begin with, we

introduce the business model concept by briefly describing its emergence. We then move on

to present some of the many existing definitions of the term as well as accounts of which

components should be included in a business model. After this introductory section we dig

deeper into the issues raised in the existing body of literature, which have a specific relation

to competitive advantage. Two specific issues are treated: First, we review the discussion

found in the business model literature about the connection between the business model and

strategy, and, secondly, we take a look at what the literature says about successfulness in

business models.

As a summary of part II of chapter 2, we provide a full overview (table 2.2) of the business

model literature applied in this thesis. As a concluding section we propose an answer to the

research question posed above.

2.2.1 Emergence and Meaning of the Term “Business Model”

According to Magretta (2002), it was with the introduction of the personal computer and the

spreadsheet that the term business model became widespread. The spreadsheet allowed a

much more analytical approach to planning than previously when business planning usually

consisted of a single base-case forecast. The spreadsheet offered an analytical approach where

every major line item could be pulled apart into various components and subcomponents

permitting the testing and modeling of a business (Magretta, 2002). Accordingly, before the

personal computer and the spreadsheet, successful business models happened by accident and

not by planning.

19

The term business model became a buzzword with the internet boom, where an increasing

belief in a promising web-based business model became evident (Magretta, 2002). However,

the appearance of the term in academic literature can be traced back to 1990, including

several variations of the term such as “e-business model”, “new business model” or “internet

business model” (Osterwalder & Pigneur, 2005). See also the table below.

Table 2.1 Occurences of the Term “Business Model” in Scholarly Reviewed Journals

Source: Osterwalder & Pigneur (2005)

The table shows that the term is rather new in use and, furthermore, that the popularity of the

term has increased greatly around the year 2000. This underscores Magretta‟s point about the

correlation between the popularity of the term and the emergence of the Internet boom. Also,

when looking at the occurrences of the term “business model” and comparing with

fluctuations of the NASDAQ, it shows that there is a likely relationship between the concept

and technology (Osterwalder & Pigneur, 2005). Nonetheless, the significance of the term

business model has changed towards the purpose of identifying a firm‟s core logic (Linder &

Cantrell, 2000).

2.2.1.1 Business Model Definitions

While the term business model is widely discussed in today‟s business environment, it is

rarely defined explicitly (Chesbrough & Rosenbloom, 2002) and in spite of the consensus

among theorists and practitioners that a good business model is essential to every organization

(Magretta, 2002), no definition of the term has yet been generally accepted (Morris et al.,

2005). The literature overview later in this chapter (table 2.2) presents business model

definitions from all authors applied in this thesis. In this section, however, we introduce some

of the overall tendencies in defining what constitutes a business model.

20

The largest volume of research on business models comes from e-commerce. In this context,

Mahadavan (2000) defines a business model as consisting of value, revenue, and logistics and

thus does not explicitly focus on internal aspects such as core competences or core

capabilities. Whereas Mahadevan (2000) and others (e.g. DeYoung, 2005; Kraemer et al.,

2000; Hayes & Finnegan, 2005; Osterwalder & Pigneur, 2005) focus on business models in

relation to e-commerce, Davenport et al. (2006) focus on business models in relation to

innovation. According to Davenport et al. (2006) a business model is defined as: “simply the

„way of doing business‟ that a firm has chosen: its entire system for creating and providing

consistent value to customers and earning a profit from that activity, as well as benefit for its

broader stakeholders.” In fact, several of the definitions of the business model are defined in

the area of value creation in order to describe the content, structure, and governance of

transactions designed to create value through the exploitations of business opportunities

(Amit & Zott, 2001). Yet another approach to defining the business model is the distinction

from or integration with the concept of strategy. Linder & Cantrell (2001) and others (e.g.

Magretta, 2002; Mansfield & Fourie, 2004; Seddon et al., 2004;), argue that strategy and

business models are two distinct and complementary tools. Accordingly, the business model

is the company's "logic for making money in the current business environment". Strategy

relates to the company's overarching aspirations and position in the industry. The opposite

view is presented by e.g. Shafer et al. (2005), who argue that it is difficult to separate strategy

from the business model, and thus define the business model as a representation of a firm‟s

underlying core logic and strategic choices for creating and capturing value within a value

network.

As noted earlier, the business model concept has been approached from a number of different

perspectives, and, hence, not only is the definition unclear, but also several alternative models

exist consisting of a variety of components. We will examine this further in the next section.

2.2.1.2 Business Model Components

In the previous section we introduced the diversity of definitions of the business model. To

sum up, the definitions differ in perspective and viewpoint and no common definition has yet

been accepted by the business community (Shafer et al., 2005). In addition, the various

definitions envelop a range of business model components. In the following section we give

some examples of these business model components, as they are essential to the business

model proposal presented later in the thesis.

21

To Hedman & Kalling (2003) the business model encompasses several components at

multiple levels. The different levels include the market, the offering, activities, company

resources and organization. Components at each of these levels include for example

customers and competition (market level), pricing and costs (offering level), human and

physical resources (resource level). In addition, Hedman & Kalling‟s account of the business

model shows the process of how internal factors are transformed into resources and further

into products and offerings and into the market through activities and structure. Hence the

components of the business model are closely related to and integrated with concepts drawn

from the theories of I/O and RBV which will be discussed later in the chapter.

Shafer et al. (2005) also include several components in their definition of a business model as

illustrated in figure 2.1 below. The first term in the model „strategic choices‟, reflects the

choices that have been made in the organization. Moreover, the terms „creating and capturing

value‟ is argued to be fundamental functions that all organizations have to perform in order to

differentiate themselves from competitors and thus be successful. In addition, firm specific

core competencies, capabilities, and positional advantages can serve as a unique way to

differentiate from competition. Furthermore, the authors argue that these functions have to be

seen in the context they occur, namely within a „value network‟ where unique relationships

are of great importance and thus an essential component of a business model.

Figure 2.1: The components of a business model

Source: Shafer et al. (2005)

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Whereas Shafer et al. (2005) emphasize the importance of value creation and value capture,

Hedman & Kalling (2003) focus on processes and activities as well as input from the factor

market. However, they agree on the importance of value network, where the supply chain and

partner network are argued to be critical components of a business model (Shafer et al., 2005;

Hedman & Kalling, 2003).

An alternative perspective is presented by Chesbrough (2007b) who argues that companies

need to open their business models. The way to do this is by using outside ideas and

technologies in internal product development and by allowing inside intellectual property to

be commercialized externally. Accordingly, a business model of open innovation leads to cost

and time savings. The component „costs‟ is argued to be important since it is no longer merely

internally developed, but also externally developed.

Many different components are presented in the business model literature, and the

components mentioned above are merely a sample. In our initial rough list of 55 articles,

across 23 articles where business model components are listed, 39 different components were

identified. In table 2.2, we list the components that the authors, applied in this thesis, include

in their business model proposal.

2.2.2 Issues Raised in Relation to Competitive Advantage

This section of the review takes a closer look at the issues raised in the business model

literature, which can be said to have a specific relation to competitive advantage. We find that

there is an active discussion in the business model literature as it concerns the distinction from

or integration with the concept of strategy in general and with the perspectives of I/O and

RBV in particular. Also, many authors are concerned with the question of what makes a

business model successful and how business models can help firms outperform competition.

These two topics, i.e. the relation with strategy and the question of successfulness, are the

issues we include as it pertains to competitive advantage.

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2.2.2.1 Business Model and Strategy

“Today, “business model” and “strategy” are among the most sloppily used

terms in business; they are often stretched to mean everything – and end up

meaning nothing.” (Magretta, 2002, p. 92)

In Osterwalder & Pigneur‟s (2005) account of business model literature they find that the

debate about the differences between strategy and business models reveals widely differing

opinions. Several authors who write within this field do not take account of the relation

between “business model” and “strategy” and even use the terms interchangeably.

Nevertheless, the authors who do explicitly deal with the relation between the business model

and strategy can be divided into two groups: Those who see a relation, yet a clear separation

or distinction between the two concepts, and those who might be said to support Hedman &

Kalling‟s (2003) notion that the business model unites the finer aspects of strategy. These

views are presented in the following with an initial account of the general relation between

the business model and strategy and then by digging deeper into the views on I/O and RBV

offered by the business model literature.

In their review of the existing literature, Seddon et al. (2004) find several overlapping

definitions of “business model” and “strategy” and are frustrated to admit; “we don‟t clearly

understand the differences between these terms.” (p. 428). They start by asking the question:

Which of the following diagrams (which illustrate the possible overlap between the two

concepts) is more correct?

Figure 2.2: Possible Overlap Between the Concepts “Strategy” and “Business Model”

Source: Seddon et al. (2004)

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They then make the case for viewing a business model as an abstraction of strategy:

“A business model outlines the essential details of a firm‟s value proposition for

its various stakeholders and the activity system the firm uses to create and

deliver value to its customers. If Porter [1996, 2001] is used to define strategy,

a business model may be defined as an abstract representation of some aspect of

a firm‟s strategy. However, unlike strategy, business models do not consider a

firm‟s competitive positioning.” (Seddon et al., 2004, p. 429)

Furthermore they conclude that this view is consistent with the current literature in the field,

e.g. Magretta (2002), Linder & Cantrell (2000). Hence, Magretta (2002) also considers

competition to be strategy‟s job. The business model is not the same as a strategy, she argues

and the dimension of competition is exactly what separates the two. The business model can

be identical for several firms, but they will need a strategy to differentiate themselves in terms

of customers, markets, products and services as well as value creation. She offers the example

of Wal-Mart which operates a widely used business model (discount retailing) but has

differentiated itself from the start by choosing specific locations, specific brands and specific

processes within the areas of purchasing, logistics, and information management. It is the

firm‟s strategy in this respect, the author concludes, that sets Wal-Mart apart from

competitors.

Shafer et al. (2005) also explicitly consider the business model as a concept that differs from

that of strategy. While admitting that it is not a trivial task to define “strategy”, they

summarize the field as made up by contributors ranging from Henry Mintzberg over leading

strategist Michael Porter to management guru Peter Drucker. Although these contributors

differ widely in perspective, the authors argue that there is a common element which is:

Making choices. The business model, on the other hand, is a reflection of those choices and

their operating implications. Hence, it can be used as an analytical tool to test and validate the

choices.

Zott & Amit (2008) suggest that the business model is a relatively new concept within the

strategy literature. In their article on the fit between product market strategy and business

model, they coin the business model as a valid and distinct concept. The business model as a

source of value can help explain why some firms outperform others, and its rationale for value

creation and appropriation differs from that of a firm‟s product market strategy. The concepts

25

are complements, however, rather than substitutes, and the authors find significant effects on

firm performance when business models interact with product market strategy.

Views on I/O and the RBV

While most authors applied in this thesis refer to and draw on work written by Porter and/or

authors within the tradition of the RBV (e.g. Betz, 2002; Chesbrough & Rosenbloom, 2002;

Dubosson-Torbay et al., 2002; Mansfield & Fourie, 2004; Hayes & Finnegan, 2005; Morris et

al., 2005), few explicitly deal with the theoretical linkages between the business model and

the two theoretical perspectives of I/O and the RBV. In the following, we present the views of

those who do, as the issue is connected to creating and sustaining competitive advantage.

Hedman & Kalling (2003) have an extensive discussion of the relationship between the

business model concept and the strategic perspectives of I/O and the RBV. The authors tie the

concept of the business model directly to the RBV but includes Porter‟s conception of

strategy as well. Their business model proposal encompasses Porter‟s value chain, generic

strategy choices, five forces, together with a specific resource level and a longitudinal

dimension. Hence, the authors introduce the business model as a promising integrator of

disparate views on strategy and argue that strategy research covers many if not all of the

theoretical components included in the business model concept. In their review of the strategy

theory (in the context of this thesis our focus is limited to comments on I/O and the RBV)

Hedman & Kalling note that “the strategy field is fragmented and there is no such thing as

one strategy” (Hedman & Kalling, 2003, p. 51). But even if the strategy concept, in theory,

can mean whatever phenomenon subjectively is attached to it (e.g. industry position, product

range, resource-bases, etc.), the authors argue that it is possible to integrate relevant

components into one model. They take what they view as a set of valuable concepts from

different strategic perspectives and offer it as their business model proposal. Hence, the

business model is in fact a strategy model and it unites “the finer aspects of strategy, such as

resource-bases, activities, structure, products, and external factors” (Hedman & Kalling, 2003,

p. 49). The authors also claim that what strategists still argue about is what makes companies

successful: Internal resources (Barney, 1991), value chain reconfiguration (Porter, 1985), or

generic strategy (Porter, 1980).

Other authors who explicitly deal with the interaction between the I/O perspective and the

RBV and their relation to the business model are Seddon et al. (2004). As discussed earlier in

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this part of the chapter, Seddon et al. view the business model as an abstraction of strategy,

and strategy, they argue, contain elements of both I/O and the RBV. While recognizing that

there are several conceptualizations of strategy, the authors choose to work with what they

call “the Harvard school‟s latest conceptualization of strategy”, represented by Porter‟s

contribution to the literature in 1996 and 2001. However, both I/O and the RBV have strongly

influenced this conceptualization, and the authors show this in a model which describes the

evolution of the Harvard school‟s thinking on strategy. According to the authors, Porter‟s

conceptualization is a mutation of the different perspectives and models from 1996 and 2001,

which is indicated by arrows 1a/b and 2a/b in the figure below.

Figure 2.3: Evolution of “Harvard School” Thinking on Strategy

Source: Seddon et al., 2004: 431, figure 3

Schweizer (2005) argues that the RBV is the underlying foundation for his typology of

business models. On top of the RBV lie other strategic perspectives, e.g. the value chain and

strategic network theory, which also influence the business model configuration. Schweizer‟s

rationale for placing the RBV as the underlying foundation for his configuration of business

models is that it is necessary to identify and develop resources and capabilities which are

crucial to sustained competitive advantage (Schweizer, 2005). According to the author, the

RBV offers two distinct contributions in this regard: First, the value of the business model

increases as the bundle of resources and capabilities it comprises becomes more and more

27

difficult to imitate, less transferable and more complementary. Second, a firm‟s existing kind

of capability or core competence allows for decision on the type of business model best suited

in a given competitive situation.

Amit & Zott (2001) study the sources of value creation in e-business and to this purpose they

explore the sources of value creation in entrepreneurship and strategic management literature.

Specifically, the authors draw on the theoretical views of Porter‟s value chain, Schumpeter‟s

creative destruction, the RBV, strategic networks and transaction costs economics. Their

review of theory and analysis of e-business lead Amit & Zott to propose the following

definition of a business model:

“A business model depicts the content, structure, and governance of

transactions designed so as to create value through the exploitation of business

opportunities.” (Amit & Zott, 2001, p. 511)

This definition draws on all the theories mentioned above and at the same time, it constitutes

the business model as a new unit of analysis. This is a way of integrating five theoretical

approaches, which otherwise work with distinct units of analysis, i.e. activities, the

firm/entrepreneur, resources and capabilities, networks, and transactions (Amit & Zott, 2001).

2.2.2.3 Business Model Successfulness

Apparently, all authors writing within the domain of business model literature find it

necessary for a firm to have a business model, or argue that even if managers cannot express

it in words, all firms in fact do have a business model.

But what kind of business model should the firm adopt? What kind of business model leads to

success, or in the terminology of this thesis: what kind of business model leads to sustained

competitive advantage? Several authors, though far from each contributor to the field,

explicitly touch on this subject - but from varying perspectives. We will outline these

perspectives below and we take the liberty of dealing with them under the general term of

“successfullness”, although we cannot say if this abstraction is necessarily true to the

intentions of all the authors.

“How do companies succeed?” ask Linder & Cantrell (2000) and answer, “They choose an

effective business model and execute it superbly. And then they renew it when competitors

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threaten distinctiveness. According to the authors, there is no guarantee for financial success,

however, there are three characteristics of a successful business model: It offers unique value,

it is hard to imitate, and it is grounded in reality (Linder & Cantrell, 2001).

Walters (2004) also mentions specific attributes of the business model, which the firm should

focus on. These five attributes are: Cash flow, return on investment (ROI), distributed assets

(low capital intensity), core assets and distinctive capabilities and finally the firm‟s

positioning in the industry value chain.

Other authors define specific and/or generic business models and discuss which entire model

is the most successful. Zott & Amit (2007) find that the so-called novelty-centered business

model, in which a firm‟s business model either creates a new market or innovates transactions

in existing markets, matters to the performance of firms. In a later article they couple this

specific business model with product market strategy, and argue that the novelty-centered

business model combined with differentiation, cost leadership, or early market entry enhance

firm performance (Zott & Amit, 2008).

Schweizer (2005) draws two conclusions about which of three business models are the most

successful. The first one is that the models called the Layer Player Model, in which a firm

specializes in one crucial and value-adding step of an industry‟s value chain, and the Market

Maker Model, in which firms use informational advantages to create an entire new layer in

the value chain, can be profitable for a few companies in a specific industry. However, the

models also run enormous risks if competitors catch up, because they are based on

competence-enhancing technology in combination with either legal protection or tacit/implicit

knowledge, which in effect function as strong appropriability regimes. Therefore, as the

second conclusion, the model called the Orchestrator Model, in which a firm focuses on one

or a few steps of the value chain while outsourcing and coordinating others, can have the best

long-term potential and the highest probability of becoming a dominant business model

design.

Open business models where firms actively search for and exploit outside ideas and in turn

allow unused internal technology to flow to the outside for other firms to benefit from are

what enables an organization to better create and capture value (Chesbrough, 2007b).

Furthermore, thinking of the business model in stages can help managers improve a specific

29

business model, Chesbrough argues (2007a). He shapes an entire Business Model Framework

(BMF), which sequences possible business models from basic and not very valuable models

to advanced and very valuable models. The highest achievement is a level 5 and 6 model,

where the firm integrates its innovation process with the business model and where key

suppliers and customers are business partners with whom the firm may share both technical

and business risks. However, even if firms should reach these levels where the business

model is likely to be very profitable and hard to imitate, no great business model lasts forever,

the author argues (Chesbrough, 2007a).

Reshaping a business model can be characterized as a learning process and facilitates

mappings and this may contribute importantly to success (Chesbrough & Rosenbloom, 2002).

It is also this process of continuing business model innovation, Mitchell & Coles (2003)

argue, that provides a way to outperform competition. Top performers frequently make

fundamental improvements of their business models and most effective firms shift models

every two to four years, according to the authors. These firms combine ongoing, effective

strategies with business model innovation on a regular basis.

Linder & Cantrell (2000) also propose that firms should master the ability to change. They

argue that in order for firms to prosper it is important to experiment with new business

models (Linder & Cantrell, 2002). The best way to do this is via the organizational mindset as

opposed to changing organizational structure, and this “mindset”, the authors argue, equals

the firm‟s working business model. Firms that learn to manage different mindsets instead of

different organizational blocks, can reap big payoffs as they avoid the traumas that can be

caused by repeated structural changes.

Davenport et al. (2006) argue that for firms to compete, they must consistently create and

destroy their own business models. This means, the authors explain, that firms must manage a

portfolio of multiple business models to avoid a fixation on the existing business model. Also,

firms should be able to “unlearn” past successes and strategic mindsets in order to avoid path

dependency. It is this process of systematic reinvention that firms should strive for (Daven-

port et al., 2006).

Morris et al. (2005) distinguishes between generic and unique elements, all entailed in the

actual business model. The authors split the business model into three levels and the first

30

level, which is dubbed the foundation level, contains the essence of the business model and is

generic. The next level, the proprietary level, is where applying unique approaches to the

foundational components creates sustained advantage. The proprietary level is strategy

specific, the authors argue. The last level, the rules level, is also closely linked to the success

of the business model, as this is where certain guidelines are ensured. Consistent adherence to

these basic principles can distinguish companies with otherwise similar business models

(Morris et al., 2005).

Other authors argue that what constitutes a successful business model depends on the

situation. Choosing an appropriate business model is based on the context and factors specific

to the firm according to Mahadevan (2000). The business model is a contingency model with

an optimal mode of operation for a specific situation in a specific market, say Mansfield &

Fourie (2004). Kraemer et al. (2000) investigate the case of Dell and propose that this is an

illustration of how one business model may have inherent advantages under particular market

conditions. Also arguing that it is the context that gives the business model meaning are

Chaharbaghi et al. (2003). They propose that a change of context requires a change of

business model. Firms can increase the possibility of “surviving and thriving” by creating

their own formulas for success. The most effective tool to do this is not the business model

itself, but by working with a meta-model and recognizing the relationship between the meta

and micro level (Chaharbaghi et al., 2003).

In the next section we summarize all the contributions to the business model literature

reviewed for use in this study. The contributions are gathered in table 2.2 below, which

includes a summary of all the issues treated in the literature review as it relates to the authors

who deliver the primary contributions to the theoretical framework of this thesis. In the last

part of this chapter, which follows table 2.2, we conclude on this part of chapter 2 and answer

research question 2.

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2.2.3 Theoretical Overview of Business Model literature Author Title Year Journal Business Model Definition Business model

components Business Model Successfulness

Business Model and Strategy

Views on I/O and the RBV

AMIT, R. and ZOTT, C.

Value Creation in E-Business

2001 Strategic Manage- ment Journal

A business model depicts the content, structure, and governance of transactions designed so as to create value through the exploitation of business opportunities.

Ressources/Assets, Capabilities/Competen-cies, Information flows, Output (offerings), Product/ service flows, Business opportunities, Create value, Transaction content, Transaction governance, Transaction structure

N/a N/a I/O and the RBV are theoretical views on value creation, which (amongst others) can be integrated in the business model. In this way it becomes possible to conduct analysis in spite of the perspectives' otherwise distinct units of analysis, and to secure that important insights from each perspective are not lost.

CHAHAR-BAGHI, K., FENDT, C. and WILLIS, R.

Meaning, legitimacy and impact of business models in fast-moving environments

2003 Manage-ment Decision

Business models are a representation of management thinking and practices that help businesses see, understand and run their activities in a distinct and specific way. While specific business models are built to describe particular business activities, the meta-model provides the underlying blueprint from which these models are developed.

Way of thinking, operational system, capacity for value generation

Context gives the business model meaning. Firms can increase the possibility of surviving and thriving by creating their own formula for success. An effective tool to do this is not the business model itself but the recognition of a relation between a meta and micro level.

N/a N/a

CHES-BROUGH, H.

Business model innovation: it's not just about technology anymore

2007a Strategy & Leadership

See Chesbrough & Rosenbloom (2002) in this table

Value network (Suppliers/partners), Customer (target market, scope), Value proposition, Revenue/Pricing, Cost, Strategy, Sale, Innovation

Highest achievement is when the firm integrates its innovation process with the business model and when key suppliers and customers are business partners who share the business risks.

N/a N/a

32

CHES-BROUGH, H.W

Why Companies Should Have Open Business Models

2007b MIT Sloan Manage-ment Review

A business model performs two important functions: It creates value, and it captures a portion of that value. The first requires the definition of a series of value-adding activities. The second requires the establishing of a unique resource, asset or position within that series of activities in which the firm enjoys a competitive advantage. Open business models enable an organization to be more effective in creating and capturing value by leveraging more ideas via the inclusion of external concepts and the utilization of assets, resources or position in other companies' businesses.

Open business models lead to enhanced value creation and capture. Firms should actively search for and exploit outside ideas and in turn allow unused internal technology to flow outside.

N/a N/a

CHES-BROUGH, H. and ROSEN-BLOOM, R.S.

The role of the business model in capturing value from innovation: evidence from Xerox Corporation's technology spin-off companies

2002 Industrial & Corporate Change

A business model is defined by six attributes: Articulation of the value proposition; Identification of the market segment; Definition of the value chain; Estimation of cost structure and profit potential; Description of firm positioning within the value network; and formulation of competitive strategy.

Reshaping the business model is a learning process which facilitate mappings that may contribute importantly to success.

The business model and strategy are different concepts. The business model focuses on value creation and assumes that knowledge is cognitively limited and biased. Strategy focuses on value capture and sustainability as well as competitive threats. It is value for shareholders that strategy is concerned with as opposed to value for the business.

N/a

DAVENPORT, T.H., LEIBOLD, M. and VOELPEL, S.

Strategic management in the innovation economy: strategy approaches and tools for dynamic innovation capabilities

2006 Book The "way of doing business". A business model is a firm's entire system for creating and providing value to customers and earning a profit from that activity as well as benefit its broader stakeholders.

Value network (Suppliers/partners), Value proposition, Strategy, Customer, Capabilities/Competencies, Processes/Activities, Economics, Management, Technology, Legal issues

In order to compete, firms must manage a portfolio of business models and consistently create and destroy them via a process of systematic reinvention.

N/a N/a

33

HEDMAN, J. and KALLING, T.

The business model concept: theoretical underpinnings and empirical illustrations

2003 European Journal of Information Systems

The business model is a strategy model which unites the finer aspects of strategy, i.e. resource-bases, activities, structure, products, and external factors.

Value network (Suppliers/partners), Customer (target market, scope), Ressources/Assets, Value proposition, Capabilities/Competencies, Processes/activities, Revenue/Pricing, Competitors, Cost, Output (offerings), Strategy, Customer relationship, Differentiation, Financial aspects, Culture, Management

N/a The business model integrates different strategic perspectives and encompasses elements from Porter, the RBV and the strategy process perspective.

I/O and the RBV (and the strategy process perspective) can be integrated via the business model which is also shown in an empirical example. I/O and RBV are in focus because both perspectives are interested in competitive advantage. In spite of the many existing strategy perspectives it is possible to integrate relevant components in one model.

LINDER, J.C. and CANTRELL, S.

Changing Business Models: Surveying the Landscape

2000 Accenture Institute for Strategic Change

A business model is also known as an "operating business model" and it is defined as the organization's logic for creating value. It explains how an enterprise makes money and a good business model highlights the distinctive activities and approaches that enable the firm to succeed.

Value network (Suppliers/partners), Value proposition, Customer (target market, scope), Ressources/Assets, Revenue/Pricing, Create value, Economics, Customer relationship.

Companies succeed when they choose an effective business model and execute it superbly.

Existing strategic frameworks are not comprehensive enough to describe the wide variety of business model choices.

N/a


Five business-model myths that hold companies back

2001 Strategy & Leadership

The business model is the company's logic for making money in it's current business environment.

A successful business model has three characteristics: It offers unique value, it is hard to imitate, and it is grounded in reality.

N/a N/a


It's All in the Mind(set)

2002 Across the Board

Business models are organizational mindsets.

Firms that manage different mindsets in the experimentation with new business models can reap big payoffs.

N/a N/a

MAGRETTA, J.

Why Business Models Matter

2002 Harvard business review

The business model as a system is a description of how the pieces of a business

fit together. However, it does not deal with competition.

Value proposition, Customer (target market, scope), Cost, Economics, Profit

The business model does not make a firm unique - strategy does.

The business model is distinct from strategy. It can be identical for several firms

while the firm's strategy is what sets the firm apart from competitors. Competition is the dimension which separates the two concepts from each other.

N/a

34

MAHADEVAN, B.

Business Models for Internet-Based E-Commerce: AN ANATOMY

2000 California manage-ment review

A business model is a unique blend of three streams that are critical to the business. These include the value stream for the business partners and the buyers, the revenue stream, and the logistical stream.

Value network (Suppliers/partners), Value proposition, Revenue/Pricing, Product/service flows

The choice of an appropriate business model is based on context and factors specific to the firm.

N/a N/a

MANSFIELD, G.M.

and FOURIE, L.C.H.

Strategy and business

models -- strange bedfellows? A case for convergence and its evolution into strategic architecture

2004 South African

Journal of Business Manage-ment

The business model is a contingency model and it

describes linkages between firm resources, functions, and environment.

Value network (Suppliers/partners),

Product/service flows, Information flows

The business model has an optimal mode of operation

for a specific situation in a specific market.

Business models identify other factors than strategy.

Sustained competitive advantage is the concern of strategy, which concentrates on the firm's relationship with the environment. The business model focuses on the customer as a source of value creation.

The RBV perspective begins to parallel that of the

business model: it is value creation with ressources and capabilities. Porter and RBV are not mutually exclusive.

MITCHELL, D. and COLES, C.

The ultimate competitive advantage of continuing business model innovation

2003 Journal of Business Strategy

The business model is a combination of the elements involved in providing customers and end users with products and services, i.e. the "who, what, when, why, where, how, and how much".

Value network (Suppliers/partners), Value proposition, Customer (target market, scope), Ressources/Assets, Capabilities/Competencies, Revenue/Pricing, Processes/activities, Output (offerings), Product/service flows, Cost

N/a N/a N/a

MITCHELL, D.W. and COLES, C.B.

Business model innovation breakthrough moves

2004a Journal of Business Strategy

ibid. N/a N/a N/a

MITCHELL, D.W. and COLES, C.B.

Establishing a continuing business model innovation process

2004b Journal of Business Strategy

ibid. Continuing business model innovation is a way to outperform competition. Top performers improve the fundamentals of their business model every two to four years.

N/a N/a

35

MORRIS, M., SCHINDE-HUTTE, M. and ALLEN, J.

The entre-preneur's business model: toward a unified perspective

2005 Journal of Business Research

A business model is a concise representation of how an interrelated set of decision variables in the areas of venture strategy, architecture, and economics are addressed to create sustained competitive advantage in defined markets.

Value network (Suppliers/partners), Strategy, Capabilities/Competencies, Output (offerings), Financial aspects, Create value, Economics, Competitors

Applying unique approaches to the foundational components of the business model creates sustainable advantage. Consistent adherence to basic guidelines on the rules level can distinguish companies with otherwise similar business models.

Strategic decision variables are part of the business model which is a representation of strategy, architecture, and economics work to solve the challenge of sustained competitive advantage.

N/a

SCHWEIZER, L.

Concept and evolution of business models

2005 Journal of General Manage-ment

Business models are defined along three dimensions: Value chain constellation, power of innovators vs. asset owners, and total revenue potential. A typology is developed consisting of four different configurations of specific business models with each their definition.

Value network (Suppliers/partners), Strategy, Innovation

Specializing in one crucial step of the value-chain (Layer Player) or using information advantages to create a new layer in the value chain (Market Maker) can be profitable for a few companies in a specific industry. However, in the long run the best potential for success lies in focusing on few steps of the value chain while outsourcing and coordinating the remaining (Orchestrator).

N/a The RBV is the underlying foundation for the business model. On top of this lie other strategic contributions among which are the value chain which also influence the business model configuration. RBV, however, is foundational because it is necessary to identify and develop resources and capabilities in order to create sustained competitive advantage.

SEDDON, P.B., LEWIS, G.P., FREEMAN, P. and SHANKS, G.

The Case for Viewing Business Models as Abstractions of Strategy

2004 Communi-cations of AIS

A business model outlines the essential details of a firm's value proposition for its various stakeholders and the activity system the firm uses to create and deliver value to its customers. If Porter [1996, 2001] is used to define strategy, a business model may be defined as an abstract representation of some aspect of a firm's strategy. However, unlike strategy, business models do not consider competition.

Value proposition, Strategy, Create value

N/a The business model is an abstraction of strategy that supresses irrelevant details and capture certain aspects of the firm's strategy. Many firms can have the same business model, but strategy is particular to the individual firm. This is so, because unlike strategy, the business model does not consider competitive positioning.

The Harvard School's latest conceptualization of strategy, which is represented by Porter's 1996 and 2001 contributions, is a mutation of different perspectives. The RBV and Porter's five-forces, value chain and generic strategy together with the SWOT analysis has had the greatest impact.

36

SHAFER, S.M., SMITH, H.J. and LINDER, J.C.

The power of business models

2005 Business horizons

A business model is a reflection of a firm's strategic choices and it facilitates analysis, testing, and validation of these choices.

Value proposition, Strategy, Customer (target market, scope), Ressources/Assets, Capabilities/Competencies, Revenue/Pricing, Processes/activities, Output (offerings), Financial aspects, Product/service flows, Cost, Create value, Customer relationship, Competitors, Differentiation, Branding, Mission

The propability of long-term success is increased when the organization tests its strategic options formally and rigorously through business models.

The business model is a concept which differs from strategy. Strategy is not a trivial task to define, but has a common element across definitions: Making choices. The business model is an analytical tool which reflects the choices made.

N/a

ZOTT, C. and AMIT, R.

Business Model Design and the Performance of Entre-preneurial Firms

2007 Organi-zation Science

The business model is defined as in Amit & Zott, 2001 (see top of this table). Further, a business model elucidates how an organization is linked to external stakeholders, and how it engages in economic exchanges with them to create value for all exchange partners. Business model design is defined as the design of an organizations boundary-spanning transactions.

Ressources/Assets, Capabilities/Competencies, Information flows, Output (offerings), Product/service flows, Business opportunities, Create value, Transaction content, Transaction governance, Transaction structure

A business model that creates a new market or innovates transactions in existing markets, i.e. a novelty-centered business model, is most succesful.

N/a N/a

ZOTT, C. and AMIT, R.

The fit between product market strategy and business model: implications for firm performance

2008 Strategic Manage-ment Journal

The business model is defined as in Amit & Zott, 2001 (see top of this table). Further, it represents a conceptualization of the pattern of transactional links between the firm and its exchange partners. Business models can be characterized by their design themes, which capture common threads orchestrating and connecting the firm's transactions with external parties.

The novelty-centered business model combined with differentiation, cost leadership, or early market entry enhances firm performance.

The business model and strategy are complements. The business model is a new concept within the strategy literature and has significant effects on firm performance when interacting with strategy.

N/a

Table 2.2 Theoretical overview of Business Model literature

37

2.2.4 Conclusion part II

In this concluding section of the preceding literature review, we sum up the contributions that

the business model literature offers to the discussion about creating and sustaining


It seems evident, that many authors within this literature domain take their point of departure

in a definition of the business model that includes the so-called value network, or what

Davenport et al. (2006) call an entire system for creating and providing consistent value. This

system includes not only the firm itself, but to a large extent the collaboration with partners,

suppliers, and customers. Important elements of the definitions presented are both the firm‟s

positioning within the value network, but also competitive positioning, i.e. strategy in the

“Porterian” sense, and the linkages between firm resources and the environments. Hence, it

can be concluded that the business model is indeed a strategy model which unites the finer

aspects of strategy as proposed by Hedman & Kalling (2003).

Also, most accounts of the business model include the notion of components, which,

according to Magretta (2002) is what permits the testing and modeling of a business. Working

with components and subcomponents makes it possible to pull apart various aspects of the

firm and take a closer look at fundamental functions that have to be performed to achieve

differentiation from competition and successfulness. Components can, depending on the

author, cover a range of elements spanning from resources and assets over revenue and

pricing to costs and other financial aspects.

In terms of the relation between the business model and strategy, the literature suggests that

viewing these concepts as complements can have significant effects on firm performance.

Hence, several authors support the conceptualization of the business model as a promising

integrator of disparate views on strategy. This entails business model proposals, which

include Porter‟s value chain etc. as well as the RBV. In this way, valuable concepts from

different strategic perspectives are integrated into what Amit & Zott (2001) call a new unit of

analysis, i.e. the business model, which ensures that important insights from different

theoretical approaches are not lost.

38

Finally, the business model literature also contributes with more specific views on what

constitutes competitive advantage. Some argue that a successful business model offers unique

value, is hard to imitate, and is grounded in reality. Others argue that business models can be

identical for several firms, because it is the strategy that makes a firm unique and

differentiates it from competitors. Moreover, some authors argue that what constitutes a

successful business model depends on the situation. Others develop specific typologies of

business models and discuss which ones are the most successful. These are for example

business models that create new markets, innovate transactions in existing markets, introduce

an entire new layer in the value chain or focus on few steps of the value chain and outsource

others. Openness towards ideas and technology from the outside also has effects on

performance, just as the willingness to let internal resources flow to the outside of the firm.

And what is also important is a dynamic attitude entailing the constant experimentation with

the firm‟s business model to ensure that fundamental improvements are installed whenever

competition comes too close.

39

Chapter 3: Business Model Proposition

The purpose of this chapter is to present our business model proposition and answer research

question 3:

Based on the theoretical review, how can traditional views on competitive advantage

be integrated with contributions from the business model literature into a business

model proposition?

First, we will discuss the integration of strategy and business model as it is applied in the

remainder of the thesis. This discussion is based on the findings made in the theoretical

framework in chapter 2 and is completed with a figure showing the integration of strategy and

the business model. Hereafter, we will present our business model proposition and argue for

the chosen components starting with the contribution from strategy. We then move on to the

contributions from the business model literature and argue for the chosen components and

how the business model serves as a unit of analysis and an integrator of I/O and the RBV.

Finally, we argue for the sustainability of competitive advantage as it depends upon the fit

between all the components in the proposition.

3.1 Integration of Strategy and Business Model

In the preceding chapter we have examined the strategic perspectives of I/O and the RBV and

we have reviewed literature about the business model concept in order to gain insight on this

connection. In the following we will discuss the findings so far which will lead to a figure

showing the integration of strategy and business model as they are applied in this thesis.

Accordingly, this section forms the basis for the later business model proposition, as it argues

for how traditional views on competitive advantage can be integrated with contributions from

the business model literature.

Since this thesis operates with a problem statement that deals with both business model and

competitive advantage, it is relevant to discuss whether there is a theoretical rationale for

doing this. As we mentioned in the introduction of chapter 1, the business model concept

arguably has a close relation to the theoretical field of strategy. Equally, the question of

creating and sustaining competitive advantage is an issue of strategy and in particular a

research topic for the perspectives of I/O and RBV as shown in chapter 2. However, as the

business model literature review shows, there are quite differing views on the relation

40

between the business model and strategy in general and competitive advantage in particular.

Seddon et al. (2004) argue that the business model is an abstraction of strategy and that only

this view gives the business model concept meaning. According to the authors, one specific

feature of the business model is that it does not consider competitive positioning. The

consequences of this view are that only strategy differs from firm to firm, whereas the

business model can be the same for several firms. Hence, if one follows either Porter‟s

position-based view or the RBV, the business model, in itself, cannot constitute sustained

competitive advantage. The view that competition is strategy‟s job is also supported by

Magretta (2002), which also leads to the conclusion that it is strategy, not the business model,

which sets a firm apart from its competitors. These authors, in effect, see a relation yet a clear

separation between the business model and strategy. This is also the case for other

contributors to the business model literature.

However, there is another strand of authors whose views support the notion that the business

model can play a role when discussing sustained competitive advantage. Hedman & Kalling

(2003) view the business model as an integrator of I/O and the RBV and illustrate this in a

model showing that the components of a business model include both perspectives in the

sense of resources, value chain, industry positioning and much more. Hence, the business

model unites the finer aspects of strategy, the authors argue. Schweizer (2005) shows how he

considers the RBV as an underlying foundation for the business model and also credits other

strategic perspectives, including the value chain. According to the author, the value of the

business model increases as the bundle of resources and capabilities it comprises become

difficult to imitate, hard to transfer and more complementary as according to the attributes of

competitive advantage in the RBV. Zott & Amit (2008) see the business model as a source of

value which can explain why some firms outperform others, and they see the business model

and strategy as complements rather than substitutes. They propose the business model as a

new unit of analysis which facilitates inclusion of several theoretical approaches, hereunder

I/O and the RBV, which otherwise operate with different units of analysis. This leads to a

broader perspective and a smaller risk of leaving out aspects not being given due importance.

It is this last view on the relation between the business model and strategy that we choose to

employ throughout the remainder of the thesis cf. the figure below.

41

I/O & RBV BUSINESS

MODEL LIT.

Figure 3.1 Integration of Strategy and Business Model (own illustration inspired by Seddon

et. al 2004)

As illustrated in figure 3.1, we view strategy and business model as integrated concepts.

Furthermore, we argue that contributions from the business model literature can discharge

some of the limitations found within the strategic perspectives of I/O and the RBV. We will

discuss this more thoroughly in the following.

We find it clear from the business model literature review that the issue of competitive

advantage is a concern for authors whether or not they explicitly recognize the role that the

business model plays in this connection. When discerning what makes a business model

successful, there is a significant overlap with what is regarded as sustained competitive

advantage within both I/O and the RBV. For example, Linder & Cantrell (2001) mention

characteristics that equal uniqueness and imperfect imitability, Walters (2004) mentions core

assets, distinctive capabilities and industry positioning, and Zott & Amit (2007) couple

market/transaction innovation with industry positioning when discussing business model

successfulness. Hence, the notion of successfulness is not solely about having a business

model that functions but about having a business model which in effect sets a firm apart from

competitors. Therefore, we argue that this allows for an alignment of the successful business

model with sustained competitive advantage. However, as much as the literature review gives

indications that the successful business model can be likened to competitive advantage as

defined by both I/O and the RBV, some attributes may be left out when focusing only on

these two strategic perspectives. According to Tidd et al. (2005), core competencies can

LIM

ITA

TIO

NS

of

I/O &

RB

V

42

become core rigidities in a firm and this view corresponds well with the argument by several

authors in the business model literature that the ability to constantly reshape the business

model may contribute importantly to success (Chesbrough & Rosenbloom, 2002). Mitchell &

Coles (2003) call this “continuing business model innovation” while Davenport et al. (2006)

propose that firms must consistently create and destroy their own business models in order to

compete. Linder & Cantrell also argue that in order for firms to prosper, it is important to

experiment with new business models. The arguments just mentioned indicates that a

dynamic view of the business model must also be considered in addition to the “traditional”

attributes of sustained competitive advantage as defined by I/O and the RBV. This dynamic

view could be in the form of acknowledgement of a need for continuous change and

experimentation with the business model as described by the authors just mentioned.

3.2 Proposition

Based on the discussion above, we will now present our business model proposition shown in

figure 3.2. We begin by presenting the contribution from strategy and argue for how

components from I/O and the RBV make out the foundation for competitive advantage. We

then move on to the contribution from the business model literature and argue for the chosen

components and how they serve as integrators of the two strategic directions. Finally, we

present our hypothesis i.e. that strategic fit between the specific components is needed in

order to lead to sustained competitive advantage.

Figure 3.2 Business model proposition (own illustration)

Tangible resources

Physical resources

Financial resources

Intangible resources

Human resources

Core competence

RBV

Valuable

Rare

Inimitable

Non-substitutable

Give access to new markets

Contribution to end product

Difficult to imitate

Continuity

Porters 5 forces

Internal rivalry

Threats of new entrants

Bargaining power of Suppliers

Buyer Power

Threats of substitutes

Generic Strategies

Cost leadership

Differentiation

Focus

I/O

Continuous Change and Experimentation

Openness

Value Network

Partners

Suppliers

Customers

Business Model

43

3.2.1 Contribution from Strategy

In the following section, we explain the contributions to the business model proposition

originating from the traditional strategic perspectives (see figure 3.3).

As argued in Chapter 2, Part 1, the field of I/O was pioneered by the theories of Michael

Porter (1980) where the most dominant paradigm became “The five competitive forces”. As a

result, we include Porter‟s (1996) view that strategic positioning within an industry is

essential and must be considered with a single goal in mind: Superior long-term return on

investment (Porter, 2001). Industry attractiveness is a fundamental determinant of a firm‟s

profitability and can be described by the following five competitive forces as shown in figure

3.3: 1) Internal rivalry; 2) Threats of new entrants; 3) Bargaining power of Suppliers; 4)

Buyer Power; 5) Threats of substitutes (Porter, 1985). Accordingly, the structure of the

industry strongly influences the competitive rules of the game as well as the strategies

potentially available to firms (Teece et al., 1997). As a result, a firm should seek to screen

against and exploit the competitive forces in order to obtain and keep high profitability

(Porter, 1980).

Within the chosen industry, the firm must deliver greater value or create comparable value at

a lower cost (or both) in order to outperform rivals (Porter, 1996). In other words, the firm

needs to establish a difference and, furthermore, it needs to be able to preserve this difference.

The means to do this is pursuing one of the generic strategies: Cost leadership, differentiation

or focus (Porter, 1985). Accordingly, Porter‟s generic strategies are included as business

model components as Porter (1985) argues that competitive advantage stem from choosing

one of them.

From the RBV we include Barney‟s notion that a firm is argued to have a sustained

competitive advantage when it is implementing a value creating strategy which a current or

potential competitor is not implementing at the same time and when these other firms are

unable to duplicate the benefits of this strategy (Barney, 1991).

As shown in the business model proposition, we distinguish between tangible and intangible

resources, where tangible resources are represented by physical and financial resources and

intangible resources are represented by human resources and core competence.

44

The physical resources consist of the physical technology used in a firm, including a firm‟s

plant and equipment, its geographic location, and its access to raw materials (Barney, 1991).

Financial resources include retained earnings, as well as capital from equity holders, bond

holders and other external sources (Barney & Wright, 1998).

The human resources include the training, experience, judgment, intelligence, relationships,

and insight of individual managers and workers in a firm (Barney, 1991). In addition, the

business model proposition includes Barney‟s four attributes that a resource has to contain in

order to have the potential of being a sustained competitive advantage. These attributes are as

follows: firstly, it must be valuable, in the sense that it exploits opportunities and/or

neutralizes threats in a firm‟s environment; secondly, it must be rare among a firm‟s current

and potential competition; thirdly, it must be imperfectly imitable and fourthly, there cannot

be any strategically equivalent substitutes for this resource that are valuable but neither rare or

imperfectly imitable (Barney, 1991). As shown in the business model proposition, these

attributes refer to the tangible resources and human resources.

Moreover, given the dynamic environment, it is argued by many researchers (Pringle & Kroll,

1997; Chan et al., 2004,) that intangible knowledge-based resources are more likely to lead to

sustained competitive advantage, as tangible resources have been weakened due to

globalization and other changes in the economic landscape. This argument is enforced by

Schweizer (2005) who argues that a firm‟s core competence defines the value of the business

model as well as allowing the firm to decide what kind of business model is more suited for a

given competitive situation. As a result, the business model proposition includes the

component core competence and the three criteria it has to live up to in order to lead to

sustained competitive advantage. The notion of core competence is defined as: “the collective

learning in the organization” (Prahalad & Hamel, 1990). Especially the coordination of

production skills and the integration of technologies. In addition, in order for a competence to

become a core competence, it has to 1) provide access to more than one market, 2) give a

significant contribution to the end product/products and 3) be difficult for competitors to

imitate (Hamel & Prahalad, 1994).

On the one hand, the contribution from I/O illustrates the impact of industry structure and

shows the need for firms to pursue either a cost leadership, differentiation or focus strategy as

the fundamental basis for competitive advantage. On the other hand, the contributions from

the RBV show the importance of resources and core competence in order to create a

45

competitive advantage. In addition, as the bundle of resources which the firm holds becomes

more valuable, rare, inimitable and non-substitutable, the value of the business model

increases (Schweizer, 2005). Accordingly, each approach is insufficient when applied on its

own, as it is the combination of the two views that form the basis for competitive advantage.

As argued earlier, both strategic views contain limitations such as their assumption of static

equilibrium without addressing the requirements for continued change and experimentation in

order to respond to a rapidly changing environment. Moreover, the RBV only focuses on the

difficulties of imitating, substituting or taking away resources rather than on the

complementarities or co-specialization of resources (Amit & Schoemaker, 1993). In order to

address these theoretical gaps, it is suggested by many researchers (e.g. Voelpel et al., 2004;

Chesbrough, 2007a) that firms need to continuously identify, rejuvenate and reinvent valuable

resources in order to comply to a dynamic environment.

However, in order to build unique capabilities and competencies, it is not advisable to change

strategy often, Porter argues (1996). Accordingly, firms should have a planning horizon of a

decade or more in order to avoid “inconsistencies across functions, and organizational

dissonance” (Porter, 1996). As a result, we include the component continuity in the business

model proposition. This component refers to the generic strategies and the core competence

and relates to the demand for stability in the long-term strategic goals of the firm.

Figure 3.3 Components from Strategy (own illustration)

3.2.2 Contribution from the Business Model literature

We will now move on to the contributions from the business model literature as it makes out

the other half of the business model proposition (figure 3.2).

Tangible resources

Physical resources

Financial resources


Human resources

Core competence

RBV

Valuable

Rare

Inimitable

Non-substitutable




Continuity

Porters 5 forces

Internal rivalry



Buyer Power


Generic Strategies

Cost leadership

Differentiation

Focus

I/O

46

As argued throughout the thesis, the business model literature is concerned with the issue of

competitive advantage whether or not the authors explicitly recognize the role that the

business model plays in this connection. Moreover, the business model literature shows

evidence of how I/O and the RBV can relate and reinforce one another through a value

network where unique relationships are made by taking advantage of the internal resources

and capabilities in the organization. As argued by Shafer et al. (2005), the value network is of

great importance as it can facilitate unique relationships between customers, suppliers and

partners. Amit & Zott (2001) further argue that the business model is a crucial source of value

creation for the firm and its suppliers, partners, and customers.

In addition, we contend that the argument for the integration of the two theoretical

perspectives is supported by the business model literature. Seddon et al. (2004: 431, figure 3)

operate with what they call “the Harvard school‟s latest conceptualization of strategy”, which

in essence is a mutation of the SWOT, the RBV and Porter‟s early contributions of the five

forces model, the value chain model, and generic strategies, leading to a central element

consisting of Porter‟s 1996 and 2001 articles as also referred in our argumentation for the

theoretical foundation of the business model above. Also to Schweizer (2005) the

development of resources or capabilities are crucial in order to perform the activities in the

value chain which effectively determine the extent of a firm‟s sustained competitive

advantage. Finally, we adopt the notion of the business model as a unit of analysis as

presented by Amit & Zott (2001). The authors argue for this way of integrating different

theoretical perspectives that makes it possible to work with several approaches with otherwise

distinct units of analysis. In that way, they argue, it is possible to secure that important

insights from each approach are not lost.

As a result, we include the component value network in our business model proposition as it

is argued to be a value creating component of a business model (Shafer et al., 2005; Hedman

& Kalling, 2003; Chesbrough, 2007a). In addition, value creating activities and competitive

advantage, are inseparable because value creating activities can integrate I/O and the RBV as

seen in the analysis.

This argument is reinforced by Chesbrough (2007a), who argues that key suppliers and

customers are business partners with whom the firm may share both technical and business

risks. Accordingly, a business model is likely to be very profitable and hard to imitate when it

47

exploits outside ideas as opposed to only focusing on internal core competencies and

resources as the key to competitive advantage.

This leads us to introduce a dimension of “openness” in the figure. This dimension is related

to the tangible resources and connected to the value network and serves as a way to enhance

value creation and competitive advantage in accordance with arguments by Chesbrough just

referred to.

Moreover, we introduce the component “continuous change and experimentation”, in order to

comply with the limitations of I/O and the RBV. This component refers to the value network

and should be regarded – together with the openness dimension presented earlier – as the

firm‟s realization of the risk of core competencies becoming core rigidities (cf. Tidd et al.,

2005). This component is the acknowledgement of a dynamic view of the business model;

and where the company constantly experiments with new and alternative combinations of

their resource base which can lead to innovative or fundamentally different activities,

partnerships and/or products and with the purpose of constantly working to create sustained

competitive advantage within the chosen strategic path.

As argued by Mitchell & Coles (2003) it can be said that by improving your business model,

competitors will either continue to follow your old direction or be overwhelmed and confused

by what you are doing. Either way, competitors will be left choking in your dust as you speed

off in better direction (Mitchell & Coles, 2003). The importance of change is supported by

Hedman & Kalling (2003) who introduce a longitudinal dimension in their business model in

order to cover the dynamics of the business model over time.

Furthermore, those authors within the business model literature who argue that a business

model cannot be a source of differentiation argue that this is so because a business model does

not consider a firm‟s competitive position. However, if they accept that the value chain and

value creation are central parts of the business model – and they do, cf. Chesbrough, 2007a;

Magretta, 2002; Mansfield & Fourie, 2004; Seddon et al., 2004 – we see from the analysis of

the integration of I/O and the RBV that these elements, i.e. competitive positioning and value

creating activities, are inseparable. Hence, it must be possible, as shown above, to integrate

both strategic perspectives in a business model proposition with the purpose of leading to

sustained competitive advantage. We say this, however, not arguing that it is the business

48

model as such that leads to sustained competitive advantage, but that it is possible to integrate

the relevant components of sustained competitive advantage into one model, which then

serves as a unit of analysis. Hence, competitive advantage becomes the purpose of the

business model, and we may argue that this – a purpose – is exactly what has been missing

from accounts of the business model concept, in order to give it meaning as a distinct

phenomenon.

Figure 3.4 contribution from the Business Model literature (own illustration)

With this business model proposition in place, we will now move on to our hypothesis

relating to the sustainability of competitive advantage, which depends upon the fit between

strategy and business model.

3.2.3 Integration of section 3.2.1 and section 3.2.2 for Sustained Competitive Advantage

The business model proposition presented in figure 3.2, showed how components from

strategy could be integrated with the contribution from the business model literature.

Moreover, it was concluded that the business model served as a unit of analysis and an

integrator of the two strategic perspectives, I/O and the RBV, which otherwise analyze only

the industry/firm activities or the firm as a bundle of resources, respectively. Accordingly,

this allowed us to include elements from both strategic perspectives and made the exploration

of the business model and its connection with competitive advantage operational without

missing important insights from each theoretical standpoint. Distinct from traditional value

chain analysis which centres around a single company and serves as a unit of analysis, our

business model proposition encompasses multiple firms and their resources and capabilities

(Schweizer 2005). Consequently, the unit of analysis has changed from focusing on a single

company to focusing on a value network of suppliers, partners and customers (Prahalad and

Ramaswamy, 2000 cited in Schweizer, 2005).

Value Network

Partners

Suppliers Customers


Openness

Business model

49

However, when creating a wider scope as a unit of analysis than traditional strategic analysis,

our business model proposition creates a complexity concerning the question of sustained

competitive advantage. Accordingly, the key to sustained competitive advantage is not solely

to find in the firm‟s generic strategy, internal resources or core competence or in the value

network of a firm.

In order to comply with this complexity, we hypothesize that the sustainability of competitive

advantage is dependent on the degree of strategic fit. Moreover, the strategic fit is a function

of the degree of competitive advantage (represented by section 3.2.1) and the degree of

coupling between the components (represented by section 3.2.2).

Accordingly, the chart above integrates strategy and business model for sustained competitive

advantage. As such, the chart illustrates how a given firm performs based on the strategic fit

between the X and Y axis. Accordingly, the contribution from the business model literature is

represented by the X axis, where the degree of coupling between the components can vary

from loose to strong. Coupling refers to the degree of reinforcement between the components.

Chart 3.1 Strategic Fit between Strategy and Business Models (own illustration)

(Sec

tio

n 3

.2.1

Co

ntr

ibu

tio

n f

rom

Str

ateg

y )

(Section 3.2.2 Contribution from the Business Model literature)

High

Low

Loose Strong

Degree of coupling between components

Sustained

competitive

advantage

Com

pet

itiv

e A

dvan

tage

Strategic Fit

50

Since the components are argued to be related and interdependent, changes in one component

influences all the other components. Accordingly, a strong degree of coupling is similar to

what Leinward and Mainardi (2010) call the maximum efficiency.

On the Y axis the degree of competitive advantage is illustrated as it can vary from low to

high. This degree is dependent upon the accumulated strength of the components from

strategy.

In addition, the strategic fit illustrated in the graph can vary depending on how the business

model components relate to and reinforce one another, i.e. it is the whole system of activities,

not simply a collection of parts (Porter, 1996). Strategic fit is thus central to the sustainability

of competitive advantage (Porter, 1996), and cannot be substituted by focusing only on core

competencies, critical resources, and key success factors. It is the whole that matters more

than any individual part, because competitive advantage grows out of the entire system of

activities (Porter, 1996).

Furthermore, strategic fit is fundamental to the sustainability of competitive advantage, since

it is harder to imitate a position based on a variety of related and mutually reinforcing

activities than it is to replicate single product features or processes (Porter, 1996; 2001).

Accordingly, the stronger the strategic fit is, the more sustained is the competitive advantage.

This argument is enforced by Porter (1996; 2001), who argues that strategic fit creates

superior profitability and makes it harder for competitors to imitate.

In addition, the sustainability of competitive advantage exists when the competitive advantage

is high and the degree of coupling between all the components in the business model

proposition is strong. As such, a high degree of coupling facilitates the achievement of

maximum efficiency as every component reinforces the other ones and supports the

underlying strategic purpose of the firm (Leinward and Mainardi, 2010). In addition, a

company which is positioned with a sustained competitive advantage is characterized as

selling products and services which fits with its “way to play”, i.e. market approach

(Leinwand & Mainardi, 2010), as is the case of Ryanair which will be shown in chapter 4.

Accordingly, when there is a low degree of competitive advantage and a loose degree of

coupling, there is no potential for sustained competitive advantage, and the organization

should reconsider their business model in order to survive in the long run.

51

Chapter 4: Ryanair Case Study

This chapter seeks to answer research question 4:

How can the business model proposition be empirically tested in order to

confirm or reject our hypothesis of what leads to a firm's sustained competitive

advantage?

In order to answer this research question, we use the case of Irish airline Ryanair. To begin

with, we make a brief description of the case company, where it is argued that Ryanair has

managed to create and sustain a competitive position for almost two decades. This description

thus forms the basis for the testing of our theoretically deducted hypothesis. After this case

description we move on to applying our business model proposition on the case company.

Finally, we discuss the strategic fit between the components in order to test our hypothesis of

what leads to sustained competitive advantage.

4.1 Description of Case Company

In the following the case of Ryanair is described in order to make the foundation for the later

testing of our hypothesis of what leads to sustained competitive advantage.

4.1.1 Initial efforts as a low-cost airline

Ryanair was founded in 1985 by the Ryan family as an alternative to the high fare duopoly,

Aer Lingus and British Airways (Ryanair.com/da/about). Ryanair began their initial flights

between Ireland and London with a single aircraft (Ray, 2003) offering tickets for less than

half the prices of their competitors Aer Lingus and British Airways. During the following two

years, the company expanded with 17 scheduled routes, leasing 6 jets and launching a

business class service and a Frequent Flyer Club. In spite of a large growth in the number of

passengers during its first three years in operation, the company suffered great financial

problems, and in 1989 the company abandoned the Frequent Flyer Club and the business class

service which had turned out to be a failure (Ryanair.com/da/about)

4.1.2 Re-Launching Ryanair as a „Low-Fares, „No Frills‟ Operation

In 1990 Ryanair had accumulated a loss of £20 million due to their rapid growth in aircraft,

routes and intense price competition. As a consequence, the Ryan family invested further £20

million in the company and copied Southwest Airlines‟ low fares model. They re-launched

Ryanair under a new management as Europe‟s first low fares airline. The new strategy was to

offer the lowest fares in every market, high frequency flights, moving to a single aircraft fleet

type, scrapping free drinks and expensive meals on board and reducing the lowest fares from

52

£99 to just £59 return (Ryanair.com/da/about). Over the next decade, Michael O'Leary

furthermore eliminated seat-back pockets, blankets and pillows and began charging extra for

everything. As Michael O‟Leary puts it; "Our trick is: can we shave 30 cents per passenger?

When you're serving 30 million passengers, that's an awful lot of money" (McGinn, 2004).

In 1991 the company made a profit for the first time with an audited profit of £293,000 for the

year. In 1992 Ryanair continued to restructure by cutting back routes and instead increasing

the number of jets, flight frequency and lower fares. The following three years the company

continued to launch new routes and replace old jets with new aircraft and in 1995 Ryanair

became the largest passenger airline on the Dublin-London route, thus overtaking Aer Lingus

and British Airways (Ryanair.com/da/about).

Due to the deregulation of the air travel market by the European Union in 1997, Ryanair

launched its first European routes and became a public company with a successful flotation on

the Dublin and NASDAQ (New York) Stock Exchanges. In 1998 Ryanair continued to open

up new routes in Europe and placed an order of 45 brand new Boeing 737-800 series aircraft

with a value of over $2bn. The year after Ryanair received 5 Boeing 737-800 allowing the

company to operate with significantly lower seat costs and lower airfares. Moreover, the new

aircraft offered better reliability and a better product for the customers (ibid).

In 2000 Ryanair launched its website www.Ryanair.com which became Europe‟s largest

booking website. By the end of the year the website was taking 68 % of all ticket sales and 95

% within three years (Ray, 2003). Ryanair‟s website furthermore allowed customers to hire

cars, hotels, insurance and rail services.

The following years Ryanair continued to expand to European countries and in 2002 Ryanair

put an end to Lufthansa‟s high fare monopoly, by being the first to introduce low fare flights

to Germany. In addition, Ryanair made a new order of 125 Boeing B737-800 being the

largest order by an Irish airline ever made. Furthermore, Ryanair became the No.1 Airline in

Europe in customer service due to their punctuality, fewer cancellations and least lost bags

(Ryanair.com/da/about).

In 2003 Ryanair acquired the loss making airline Buzz from KLM, which gave the company

direct access to 11 new French regional airports. The same year the company had launched 73

53

new routes and carried more than 2 million passengers in one month for the first time. During

the next two years Ryanair replaced their remaining old aircraft with new B737-800 and

became the airline with the youngest fleet in the world. The company continued to expand

with new routes and new bases. In 2005 the company had a total of 15 bases throughout

Europe and was the most searched for airline in Europe according to a Google survey (ibid).

In addition, Ryanair introduced a „no fuel extra guarantee‟, distinct from their competitors

British Airways, Air France and Lufthansa who added extra fuel surcharges depending on

current oil prices.

In 2006 Ryanair launched a web check-in service, allowing passengers to check-in online.

Moreover, the company became the first airline to announce plans for onboard mobile phone

use. The same year, Ryanair launched gaming and bingo and made a cash offer to purchase

Aer Lingus. Ryanair‟s growth continued and their competitive position has led the company

towards being the most successful low-cost airline in Europe (ibid) with 152 low fare routes

to 25 countries (Ryanair.com/da/cheap-flight-destinations) and a net income of $571.7 million

in 2008 (Datamonitor, 2009). In addition, since they re-launched Ryanair the company has

achieved €2.4 billion in net profits (Airline Business, 2009).

4.2 Applying the Business Model Proposition

In the following we will test our business model proposition (figure 3.2 repeated from section

3.2) starting with the components from traditional strategic perspectives, where the

components from I/O and the RBV are analyzed and tested in the case of Ryanair as they seek

to explain the foundation for competitive advantage. Hereafter we move on to the components

from the business model literature as they are argued to fulfill the theoretical deficiency of

both directions. Finally, we argue for the sustainability of competitive advantage as we plot

all the components into our chart of strategic fit.

54

Figure 3.2 Business model proposition (own illustration) repeated from section 3.2

4.2.1 Components from I/O

In the following, we begin by analyzing the industry structure in the airline industry in order

to determine whether or not Ryanair has managed to screen against and exploit the

competitive forces in order to obtain and keep high profitability in terms of Porter (1980).

Hereafter we discuss Ryanair‟s generic strategy in order to determine whether or not Ryanair

has managed to pursue and sustain their cost leader position.

Internal Rivalry within the Industry

“Competition in the airline industry is extremely tough” (expressed in the interview with

Jacob Pedersen, CFA senior analyst). Ryanair is not only competing with Full-Service

Carriers (FSC) which they did initially. Many airlines are copying the Southwest low cost

model e.g. EasyJet (easyjet.com), Virgin Express (virgin.com), KLM (klm.com), Go air

(goair.in) forcing Low Cost Carriers (LCC) like Ryanair to continuously change and adapt

themselves in order to attract new customers and segments and look for new ways to generate

revenue from their customers (Hvass, 2006). According to Director of Equity Research, Joe

Gill, the industry cost is a critical measurement to this end: “In the case of Ryanair it has

been consistent for the past 20 years (…) they understand how to secure their financials (…)

Ryanair has the ability to keep their unit costs at industry low (Interview with Joe Gill,

Director of Equity Research). Accordingly, Ryanair‟s ability to sustain a competitive position

since their re-launch as Europe‟s first low fares airline in 1990 is due to obtaining the lowest

prices in the market.

Tangible resources

Physical resources

Financial resources


Human resources

Core competence

RBV

Valuable

Rare

Inimitable

Non-substitutable




Continuity

Porters 5 forces

Internal rivalry



Buyer Power


Generic Strategies

Cost leadership

Differentiation

Focus

I/O


Openness

Value Network

Partners

Suppliers

Customers

Business Model

55

FSC are characterized as operating at primary airports, regional, short and long routes, 2-class

seating, high frequency flights and functions completed in-house if possible (Hvass, 2006).

However, as the airline industry is no longer regulated as it was at the outset, FSC‟s are

responding to the highly competitive market by integrating LCC characteristics, thus making

competition even more brutal (ibid.). LCC‟s are characterized as offering short-haul routes,

operating a single-aircraft type, operating from secondary airports, high frequency flights,

avoiding transfer traffic, outsourcing functions when possible, offering buy-on-board catering

and selling tickets through call-centers and websites (ibid.)

Moreover, the airline industry is characterized as being price sensitive, since there is no

customer loyalty; but instead customers go for the cheapest flight to a higher extent (Interview

with Per Hvid, Head of Foreign Equities). Moreover, most cost advantages can be copied

immediately by competitor airlines, thus increasing rivalry. In addition, high fixed costs, such

as salaries and maintenance increase rivalry.

In the meantime due to the intensified competition in recent years resulting in mergers and

acquisitions as well as bankruptcy for some airlines, new entrants might be scared off. This

will reduce rivalry as the number of leading companies fall. Moreover, there are high exit

barriers in the industry due to divestment of assets (Datamonitor, 2009).

Furthermore, most leading competitors have diversified their business by carrying not only

people but also air cargo and other loads, thus becoming less reliant on sales of passenger

airline tickets, thus reducing rivalry (ibid.).

Analysts assess the overall degree of rivalry in this industry as strong (ibid.).

Threats of New Entrants

The airline industry is highly capital intensive where buying aircraft and obtaining skilled

staff to run the airline are high investment costs. This is a barrier which can be difficult for

new entrants to overcome (Datamonitor, 2009). On the other hand, CFA senior analyst from

Sydbank argues that, “it is very easy to get access to aircraft. Especially leasing aircraft is a

cheap and easy way to enter the industry, thus attracting many new entrants.” (Interview

with Jacob Pedersen, CFA senior analyst)

56

However, due to the fact that price competition is becoming more brutal, it can be difficult for

new entrants to compete on prices and make a profit since fixed costs and operation costs are

high.

Nevertheless, the deregulation (Feldman, 1988) of the industry has lowered entry barriers,

thus making the industry more attractive to new entrants. Airlines are now allowed to

negotiate with different airports about their operating arrangements, entering and exiting

routes easily, and setting fares and flight volumes according to market conditions

(Datamonitor, 2009). In addition, as argued by Head of Foreign Equities, “Many new airlines

have appeared during the last couple of years. However, many have gone under (...) Before

the liberalization of the industry, there was a monopoly situation, where SAS was the big

player (…) Today competition is very fierce and SAS is becoming the looser. Ryanair‟s

advantage is that they do not have a huge service machinery. SAS and others have many

expenses in comparison. Accordingly, they save a lot of money compared to their competitors

(Interview with Per Hvid, Head of Foreign Equities).

However, in the process of starting up a new airline, there is still a high degree of

bureaucracy. For instance getting an operating license to operate aircraft is a long-lasting

process, thus revenue generation is delayed. Another barrier to entry is infrastructure

constraints, where the negotiation of slots at the airport is an increasing hindrance for new

entrants. Due to growth in the air traffic, there has been an increasing overcrowd at many

airports, especially at major hubs. As a result, established airlines hold the monopoly over

slots at certain airports, making it difficult for new entrants to get attractive hours and

destinations. Customers might choose alternative airlines with more attractive alternatives.

Moreover, 2009 has proven to be a difficult year for the airline industry, where many airlines

have gone bankrupt (e.g. Zoom, Silvejet, XL, SkyEurope, Sterling) (Datamonitor, 2009). The

danger of low profitability may keep new entrants away. However, the situation is quite

different for airlines flying point-to-point where entry barriers are argued to be low (Interview

with Jacob Pedersen, CFA senior analyst).

Overall, analysts assess the likelihood of new entrants to be moderate for this industry

(Datamonitor, 2009).

57

Bargaining Power of Suppliers

The key suppliers in the airline industry are fuel suppliers, aircraft manufacturers, airports and

skilled employees (Datamonitor, 2009). Due to the increase in mergers and acquisition as a

consequence of the financial crisis, supplier power could be affected due to lack of demand.

However, since Boeing and Airbus have a duopoly in the manufacture of aircraft, where

Boeing is Ryanair‟s main supplier (Ryanair.com/da/about) and since there does not exist a

substitute for jet fuel, these suppliers are argued to have a certain degree of bargaining power

“Maybe they have a higher bargaining power today, especially Boeing, since they are

Ryanair‟s only supplier of aircraft. They are much more dependent on Boeing today, since it

would be very costly to change supplier and getting spare parts. However, Boeing is also very

dependent upon Ryanair as they are their biggest customer.” (Interview with Per Hvid, Head

of Foreign Equities).

In addition, airlines have to enter a contract with the suppliers when buying or leasing aircraft.

These contracts are very costly to break for the airline, thus enforcing supplier bargaining

power (Datamonitor, 2009). However, according to Jacob Pedersen, Ryanair‟s suppliers have

a low bargaining power. “Ryanair has the absolute power because they purchase big volume.

Ryanair makes money and buy when others cannot afford to - Airports crave for aircraft”

(Interview with Jacob Pedersen, CFA senior analyst). Accordingly, Ryanair achieves scale

economies thus increasing their bargaining power compared to their suppliers. However,

unlike other modes of transport, airlines have no alternative source of energy. “The only thing

that Ryanair does not have the power over is the oil price” (ibid.) Small airports are more

dependent on one airline than bigger airports, thus giving the latter a higher bargaining power.

As Ryanair‟s policy is to avoid the big airports and instead focus on the smaller ones, they

have an increased bargaining power.

Overall industry supplier power is assessed as strong (Datamonitor, 2009).

58

Buyer Power

Customers can be divided into two main groups namely leisure and business travelers, where

the latter are considered as B2B (ibid.).

“Customers have become very disloyal. Price is the offsetting factor” (Interview with Per

Hvid, Head of Foreign Equities). Accordingly, buyer power has increased with the emergence

of online booking sites (e.g. momondo.com, supersaver.com), which facilitates comparison

between all available flights, thus giving the customer the possibility of choosing the cheapest

flight. Moreover, there are low inherent switching costs because brand loyalty is low. Some

airlines have introduced loyalty schemes in order to increase switching cost (e.g. British

Airways‟ Executive Club (britishairways.com) and SAS Eurobonus (flysas.com)). These

initiatives are intended to raise firm bargaining power as customers lose their benefit by

travelling with competitors.

However, as the industry is highly price sensitive, loyalty schemes might not be enough to

sustain customers. In the case of Ryanair, before they turned the company into an LCC, they

had to abandon their Frequently Flyer Club, because it turned out to be a failure

(Ryanair.com/da/about).

Also B2B customers are looking for cost reductions due to the financial crisis. In addition,

rising unemployment and lack of job security increases buyer power (Datamonitor, 2009).

However, as argued by CFA senior analyst, “Ryanair cannot cover the entire market. It is the

cheapest part of the market that they cover which is especially B2C customers. I don‟t see

that B2B customers would choose Ryanair (..) Ryanair cover their customers‟ needs, which is

delivering the lowest prices” (Interview with Jacob Pedersen, CFA senior analyst). In

addition, individual customers have less power, since airlines do not feel an impact of losing a

single customer.

Overall, buyer power is assessed as moderate (Datamonitor, 2009).

59

Threats of Substitutes

Substitutes to airline travel are road, rail (e.g. Eurostar, TGV), and marine travel. When

choosing alternative transportation options customers focus on the time of the journey besides

price (Datamonitor, 2009). Therefore when it is a long distance travel, air travel has the time

advantage, whereas short travels might favour rail and road transportation. Rail travel has the

advantage of being localised in more accessible places, providing transportation around the

main cities in contrast to Ryanair, which does not serve major airports.

In rather large countries, air travel makes it easier to overcome long distances and has certain

benefits such as shorter travel time than rail travel, even including the time to check in.

However, in smaller countries, domestic air travel may not be so appropriate, and rail and

road transportation become more attractive alternatives. However, “since Ryanair is so cheap,

substitutes make little threat” (Interview with Jacob Pedersen, CFA senior analyst). In

continuation of this, Per Hvid argues that, “choosing another way of transport is due to other

reasons than the price” (Interview with Per Hvid, Head of Foreign Equities).

The threat of substitutes for airlines is considered to be moderate (Datamonitor, 2009).

Generic Strategies

“It seemed blindingly obvious that if we couldn‟t out-service Aer Lingus with

better business class and better service, we could certainly offer better fares.”

(Interview with Michael O‟Leary cited in Creaton, 2004, p. 89.)

As this quote indicates, Ryanair‟s initial efforts as a low-cost carrier turned out to be a failure,

as management did not focus on cost and their strategy was unclear (Creaton, 2004). Ryanair

had started as a low-cost, no-frills airline, but did not fully stick to that model, as they also

offered business-class service and other expensive features such as a frequent-flier

programme, no booking restrictions or penalties for cancellation as well as offering lower

prices than their competitors (ibid.). Ryanair was thus “stuck in the middle” of differentiation

and cost leadership, which is a pitfall according to Porter‟s (1980) theoretical framework.

This pitfall resulted in great financial losses, and at this point O‟Leary was very sceptical

about the company‟s future, believing it should close down, as it would never make money

(Creaton, 2004). Nevertheless, O‟Leary managed to turn the companies around from failing

as an FSC into the most cost-conscious and profitable airline in Europe (Calder, 2008).

60

O‟Leary‟s ability to shift generic strategy towards becoming a cost-leader has in terms of

Porter (1980) given the company a competitive advantage. However, in order to sustain this

position, the company has to continuously maximize its operational efficiency (Lawton,

1999). This means that Ryanair has to continuously look for improvements in order to

achieve low operating costs. Since the company re-launched itself in 1990, Ryanair has

managed to become the largest and most successful European low fare airline as well as the

longest established (Lawton, 1999). Accordingly, Ryanair has managed to sustain its position

as “(…)Europe‟s most profitable, lowest cost scheduled airline by providing its low fares/no

frills service in all markets in which it operates to the benefit of our passengers, people and

shareholders” (corporate mission statement, 1997 cited in Lawton, 1999). In addition, the

way in which Ryanair has managed to sustain this position is: “Firstly, the ability to keep

their costs lower than their competitors. Secondly, their ability to market themselves with

such a great success. Ryanair‟s volume in terms of passengers and revenue cannot be

matched by any competitor. Ryanair simply fly with the lowest costs and that is difficult to

beat. Ryanair is the cheapest, so if you want the cheapest you go with Ryanair” (Interview

with Jacob Pedersen, CFA senior analyst).

In the following we will go deeper into the discussion of how Ryanair has managed to pursue

and sustain their low-cost strategy by continuously finding new ways to lower their operating

costs:

Economies of density: Economies of density in the airline industry means increasing the use

of aeroplanes and/or their capacity within a network of a given size (Dobruszkes, 2006).

Ryanair has achieved density economies by making maximum use of their aircraft (Barbot,

2006; Dennis, 2004; Graham and Vowles, 2006; Hunter, 2006 cited in Dobruszkes, 2006). In

2004 Ryanair flew 11 hours per day on average, whereas FCC like BA and SN Brussels

Airlines in comparison flew 9.2 hours per day on average (Dobruszkes, 2006). As Ryanair

uses secondary airports, where turnaround is often limited to 25 minutes, the company can

benefit from higher rates of departures and fewer terminal delays (ibid.) In addition,

economies of density are argued to be much more effective in reducing costs than economies

of scale in the case of airlines (Sorensen, 1991; Caves et al., 1984 cited in Dobruszkes, 2006).

Pressure on the workforce: “The information collected by various researchers,

organizations, trade unions and journalists show that the LCCs‟ workers are paid less than

61

their fellow workers FSNC1 although having a heavier workload”. (Dobruszkes, 2006, p.

250) In addition, in 2002 the gross annual income of a pilot of short-distance carriers was

28% lower than that of the FSNC, in spite of the fact that their flying time was 25 % higher

(European Cockpit Association, 2002 cited in Dobruszkes, 2006). In addition, “Ryanair‟s

employees are rewarded through productivity rather than on the pay. Accordingly, Ryanair

has the ability to keep their unit costs at industry low” (Interview with Joe Gill, Director of

Equity Research).

Moreover, Ryanair benefits from being an Irish airline, due to the fact that the Irish legislation

is more favourable to airlines than that of other European countries (Dobruszkes, 2006). So,

even if Ryanair hires workers from e.g. Germany, they will still work under Irish contracts,

thus giving Ryanair an advantage compared to its competitors. In addition, the company does

not recognize workers‟ associations and unions, thus allowing the company to minimize costs

(Interview with Per Hvid, Head of Foreign Equities). Consequently, Ryanair provides lower

salaries, inferior vacation conditions and shift arrangements than its competitors (Creaton,

2004, p. 135).

High occupation rate: Due to the low prices, Ryanair has achieved a high load factor

compared to other airlines. Their average load factor in 1999 was 72 %, whereas the average

load factor of European airlines was 62 % (Lawton, 1999). In 2009, Ryanair‟s average load

factor had increased to 81% (Ryanair Holdings PLC, 2009). The load factor measures the

percentage of the output that the airline has sold (ibid.). Ryanair‟s manager is constantly

working on increasing the load factor “we do not manage yields, we manage the load factor

(…) our budgets are based on driving costs down by x percent next year” (Michael O‟Leary

cited in Lawton, 1999). As Ryanair attains break-even by filling just half of the seats on every

flight, keeping a high load factor gives the company a considerable profit margin in every

airplane (Creaton, 2004 p. 213).

Standardizing fleet: Through the years Ryanair has managed to standardize their fleet of

Boeing 737, which is a fleet that reduces operating and maintenance costs (boeing.com).

Moreover, standardizing the fleet reduces the costs regarding training staff, maintenance and

purchase and storage of spare parts.

1 FSNC: Full Service Network Carriers (Dobruszkes, 2006)

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Standardizing service: Ryanair offers the same service to all their customers. Whether it is

business people, students, or families, they are all handled by the same procedures. Tickets

are only available online or through calling centres, thus eliminating costs regarding travel

agents. There is a non-assigned seating arrangement (Lawton, 1999), and tickets are only sold

point-to-point, which means that no connections are possible. This simplifies luggage

handling and aircraft turnaround. In addition, the airline charges extra for everything

(McGinn, 2004), thus enabling the company to offer the lowest fares.

Moreover, the airline reduces costs by not printing tickets, not having frequent flyer

programmes and not offering compensation when flights are cancelled or delayed. However,

since 1995, EU regulations have increased the rights of air travellers in case they are being

denied boarding or in case of cancellation or long delay of flights2. However, in spite of these

EU regulations, Ryanair still holds a strict policy in relation to customer service. The

company still refuses to offer any support or assistance when flights are delayed or cancelled

(Creaton, 2004, p. 245).

On the other hand, Ryanair offers a higher customer service than that of its competitors in

regard of punctuality, fewer lost bags and fewer cancellations (Ryanair.com/da/about).

Public financing: Ryanair is the only airline that requires directly or indirect financing during

the planning of the servicing of new airports (Dobruszkes, 2006). Ryanair‟s policy is to serve

airports only where authorities give them preferential treatment. For example, in Belgium, the

authorities have given Ryanair free office space and staff training (Noakes, 2003). As another

example, Ryanair does not fly to Nice in France, because the authorities are not willing to

give the airline better treatment than its competitors (Dobruszkes, 2006).

The advantage of public financing can, however, be of concern for the airline in the future, as

the EU forbids deals where airports are owned by the public. In 2003, the Danish authorities

gave the city Aarhus orders to end a 50 per cent passenger charge subsidy paid to Ryanair

(Noakes, 2003).

2 Regulation (EC) No. 261/2004, Official Journal L 046, 17/02/2004, 0001-0008, cited in Dobruszkes (2006)

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Dynamic pricing: Whereas FCC use price discrimination techniques in terms of class

differentiation, complex systems of discounts with limited access, customer loyalty schemes

as well as overbooking techniques, Ryanair use dynamic pricing (Malighetti et al., 2009).

Dynamic pricing means that flight fares increase until the last moment before closing of

bookings. According to this technique, prices mainly depend on the trade of between the

option of waiting for a potential lower price on one hand, and the risk of seats becoming

unavailable on the other hand (ibid.) According to Malighetti et al., Ryanair‟s pricing

technique enables the company to maximize its profit.

4.2.2 Components from RBV

Emphasis will now shift from an industry focus towards a resource focus in order to clarify

whether or not Ryanair possesses a competitive advantage according to Barney (1991).

Consequently, if Ryanair has been able to implement a value creating strategy which a current

or potential competitor has not been able to implement at the same time and if other firms

have been unable to duplicate the benefits of this strategy, the company is said to possess a


In addition, the resources the firm holds should enable the firm to conceive and implement

strategies that improve its efficiency and effectiveness. Accordingly, if Ryanair possesses and

exploits resources that are valuable, rare, inimitable and non-substitutable (Barney, 1991) it

has the potential of giving the company a sustained competitive advantage.

In the following, we will make an analysis based on Ryanair‟s physical resources, human

resources and financial resources in order to examine which resources they hold are valuable,

rare, inimitable and non-substitutable, thus giving Ryanair a sustained competitive advantage

according to Barney (1991).

Physical Resources

Ryanair‟s physical resources includes its geographic location, its website, access to fuel and

aircraft.

Geographic Location

Ryanair‟s geographic location is spread on 39 bases with the home base located in Ireland,

Dublin (Ryanair Holdings PLC, 2010). Secondary and regional airports are chosen as bases.

Airport terminals away from the usual travel destinations are more on the outlook for new

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business, so Ryanair can negotiate favorable fees and get marketing and training support for

as long as 20 years. Compared to terms at Europe‟s major hubs, this suggests a shift in

bargaining balance in Ryanair‟s favor, and serving secondary airports is one of Ryanair‟s

biggest cost-saving choices (Capell et al., 2001). According to Barney (1991), Ryanair‟s

strategy of focusing on secondary airports is a valuable resource as it enables the company to

reduce cost. Moreover, the value of the resource is enforced as it responds to environmental

opportunities and threats (Barney, 1991). As argued in the industry analysis, due to

infrastructure constraints, where FCC hold the monopoly over slots at many major hubs, it is

difficult for new entrants to get attractive hours and destinations. However, Ryanair has

managed to respond to this threat by seeing secondary airports as a window of opportunity as

well as taking advantage of the liberalization of the airline industry (Harbison, 2006).

“Airports crave for aircraft. The new terminal Swift in Copenhagen Airport, is a way to

attract low-cost airlines like Ryanair” (Interview with Jacob Pedersen, CFA senior analyst).

As a result, Ryanair avoids infrastructure constraints and negotiation of slots to a great extent,

thus making this resource even more valuable (1991). In addition, as Ryanair‟s policy is to

serve those airports only where authorities give them preferential treatment, they have

neutralized a potential threat which their competitors cannot easily imitate (Barney, 1991).

Accordingly, this makes the resource rare in the sense that it prohibits perfect competition

(ibid). The strategy of choosing primary airports is a substitute to this strategy, thus making

this resource in terms of Barney substitutable (1991). However, the strategy of choosing

primary airports is normally the strategy of FSC, who has a differentiation strategy as

opposed to Ryanair‟s low-cost strategy. Nevertheless, as FSC‟s to a higher extent are

responding to the highly competitive market by integrating LCC characteristics (Hvass,

2006), it can be argued that the resource is substitutable.

Website

Ryanair‟s website also makes out a significant physical resource in terms of revenue

generation as 99 % of all sales are generated through the website where the customer has

direct access to Ryanair‟s host reservation system (Ryanair Holdings PLC, 2009).

Consequently, Ryanair has eliminated the cost of commissions to travel agents. Also, the

airline plans to make check-in available exclusively through the website (ibid), thus

eliminating the costs of airport kiosks and staff. Consequently, the website is valuable as it

improves the company‟s efficiency and effectiveness by taking advantage of the opportunities

the internet offers.

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As appendix 2 shows, the website of Ryanair illustrates that it is a LCC. The color yellow

stands for „low priced‟ (billiondollarincome.com) and in contrast to the dark blue, it attracts

attention very effectively (ibid). But the appearance of the website can easily be copied by

competing companies; however they can have difficulties imitating the benefits of the website

in terms of revenue generation. Ryanair‟s website is the most searched for airline in Europe

according to a Google survey (ibid) and according to the customers, it is the easiest travel

website to book from (Ray, 2003). This indicates that competing companies have not yet been

able to exploit their website in the same way as Ryanair, thus making this resource rare.

In addition, the website allows the company to gain additional revenue stream from

supplementary services which was not possible previously.

Ryanair works with a vast array of partners to offer these ancillary services. Ancillary

services include in-flight sale of beverages, food, and merchandise, as well as car rental,

accommodation services, travel insurance, credit cards, airport transfer and so on (see

appendix 1). Benefits derived from selling and marketing these services via the website,

might easily be copied by competing LCC. However, since the extent of the benefits and the

attractiveness to partners depend on traffic numbers, i.e. the amount of potential customers

entering the website, imitation is also subject to the competing airline‟s passenger numbers

and website success. The substitutability of this resource depends on whether or not a

competing firm is able to duplicate the benefits of this resource with a different management

team.

Aircraft

“Ryanair has a broad range of aircraft at the cheapest price (…). They make

favorable contracts with secondary airports.” (Interview with Joe Gill, Director

of Equity Research)

Ryanair carries a fleet of aircraft, which today is made up of 218 Boeing 737-800 (Ryanair

Holdings PLC, 2010). Ryanair‟s fleet is a valuable resource as it enables the firm to conceive

their low-cost strategy because a standardized fleet of only one aircraft type limits the costs of

personnel training as well as the costs of maintenance and spare parts, and it also creates

greater flexibility in the scheduling of crew and equipment (Ryanair Holdings PLC).

Moreover, Ryanair has previously been successful in negotiating very favorable contract

terms with Boeing that included price savings close to 33% per aircraft (Capell et al., 2003).

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Competing firms can easily imitate the strategy of focusing on one aircraft type, however,

Ryanair‟s ability to negotiate such a favorable contract, is argued to be difficult to copy. This

strategy is rare, as it is not possessed by a large number of firms, thus giving Ryanair the

capability of exploiting the resource. As the benefits of this resource is based on unique

historical conditions, the resource is argued to be imperfectly imitable. This is explained by

the fact that Ryanair‟s negotiation of favorable contract terms has a correlation with the

company chairman, David Bonderman, who had previously been involved in the turnaround

of Continental Airlines and had close ties with the aircraft producer. This relationship was

central to negotiations (Airline Business, 2009). Whether or not this resource is substitutable

depends on the ability of a competing firm to make a similar favorable contract with Airbus.

Fuel

One of an airline‟s key, and potentially volatile, costs is fuel. In 2009 fuel accounted for 45%

of Ryanair‟s operating costs (Ryanair Holdings PLC, 2009). Obviously, with fuel costs

accounting for such a substantial part of Ryanair‟s operating costs and considering the

airline‟s low-cost strategy and no-surcharge policy, the purchase of fuel at the lowest possible

price or elimination of risk of heavy price fluctuations are imperative. Hedging fuel prices, i.e.

taking positions in the crude oil market, is a way of bringing stability to this cost area (Dunn,

2009). However, Ryanair‟s fuel strategy has been speculative as illustrated by the company‟s

hedging policy. Below is a quote from O‟Leary, which describes very well the gambling

nature of the company‟s stance on hedging:

"We lost on it (i.e. hedging) compared with where we would have been if we

hedged, but by losing on that, we gained this year because we were unhedged

when oil prices were falling. You only gain on hedging in a rising market, but if

you're hedged in a falling market - which most of the airlines have been in the

last months - you lose. It's not possible to beat the market for oil, but what we

try to do is that if we see some kind of cost certainty out there into the future [we

take it]. For example, at the moment, we said that if it goes below $70 per

barrel, next year we'll hedge. If it goes above that, we won't hedge. We'll take

our chances." (Interview with Michael O‟Leary cited in Airline Business, 2009)

As this quote indicates, it is not possible to beat the market for oil, just as it is not possible to

foresee stock prices. Furthermore, when an airline hedges fuel costs, fuel suppliers become

anonymous in the sense that these financial transactions are traded in the open market, just as

when trading stocks or Forex (Dunn, 2009). Hence, the airline that creates the most value for

the company is the airline with the best hedging strategy, which can be argued to be

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completely arbitrary or at least vulnerable and constantly subject to unpredictable events. A

fuel strategy can therefore hardly be a source of competitive advantage, even though some

might perform better than others in the long run. A hedging program that makes suppliers

anonymous to the airline further neutralizes any opportunity to make access to fuel a valuable

or rare resource.

Human Resources

“One firm resource required in the implementation of almost all strategies is managerial

talent.” (Hambrick, 1987 cited in Barney, 1991, p. 106)

Ryanair is certainly no exception, as the company did not succeed with their low-cost strategy

until they hired the talented CEO, Michael O‟Leary in 1990. As concluded in section 4.2.1.6,

O‟Leary managed to turn the company from failing as an FSC into the most cost-conscious

and profitable airline in Europe (Calder, 2008). Michael O‟Leary is probably the most

successful airline leader ever (Airline Business, 2009), and his record speaks for itself.

According to industry magazine Airline Business‟ records, he has managed to create a net

profit of € 2.4 billion from 1998 to 2009 (ibid). Moreover, through the years his personality

and Ryanair‟s values and approach have become inseparable (ibid). In addition, Michael

O‟Leary is said to have a big ego, he is outspoken and has an unwavering focus on cost.

“When it comes to interviews, O'Leary's characteristically blunt approach

comes into force. Asked if he would do the traditional sit-down interview with

Airline Business, O'Leary questioned: "How much will it cost me?" Our reply:

"About an hour of your time." His response: "Too much."” (Interview with

Michael O‟Leary cited in Airline Business, 2009)

Moreover, the interviewer from Airline Business concludes that whether you are a competitor,

supplier or journalist, O‟Leary has an intimidating figure, where his direct and aggressive

approach repeatedly makes him get it his way with suppliers.

This argument is enforced by Jacob Pedersen who argues that, “O‟Leary‟s rhetoric has

created the successful airline (...)He is so straightforward and says it as it is. That definitely

creates an identity in the organization - to have a manager who speaks up and demands

everybody to do what he says” (Interview with Jacob Pedersen, CFA senior analyst).

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In conclusion, there is no doubt that Michael O'Leary has enabled the company to conceive

and implement strategies that has improved the company‟s efficiency and effectiveness. His

focus on cost is what makes Ryanair stand out from every other airline.

Obviously, Michael O‟Leary is a unique resource among competing and potentially

competing firms, as his skills and talent to implement and sustain a low-cost strategy are rare.

Moreover, O‟Leary‟s reputation among suppliers (Porter, 1980 cited in Barney) and

customers as well as his relationship to partners is imperfectly imitable due to social

complexity (Barney, 1991).

So far, there has not been a strategically equivalent valuable resource, as Ryanair is still the

airline with the lowest-cost in Europe. Putting this in figures, Ryanair‟s unit cost gap in 2009

compared with budget rival EasyJet was €23 and €33 in comparison to Aer Lingus (Airline

Business, 2009). In conclusion, Michael O‟Leary is a resource that is valuable, rare,

imperfectly imitable and non-substitutable, thus giving the company a competitive advantage.

Beside Michael O‟Leary, the company currently employs 7,000 persons (Ryanair Holdings

PLC, 2010). The skills of their cabin crew within the field of sales make out an important

resource, as they are imperative to the generation of ancillary revenues comprising around a

fifth of the company‟s total revenue. However, even though Ryanair relies heavily on the high

productivity of their staff (European Low Fares Airline Association (ELFAA), 2004), the

productivity is usually an effect of management‟s implementation of efficient rosters meaning

fewer overnight stops, and remuneration packages structured to include a large part of

payment from productivity performance (Kaberry, 2007).

Financial Resources

Ryanair would not have existed today if it wasn‟t for the Ryan family‟s deep pockets so to

speak. As mentioned in the case description, Ryanair had accumulated a loss of £20 million in

1990, where they proceeded to invest further £20 million in the company. Whereas most

companies would have been forced out of business due to liquidity problems, Ryanair got a

second chance, due to their financial resources. Since then, the company has managed to

create a net profit of € 2.4 billion from 1998 to 2009 (Kaberry, 2007) under the management

of O‟Leary. In addition, Ryanair is the largest airline in Spain, larger than Iberia, the largest

http://www.flightglobal.com/landingpage/aer%20lingus.html

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airline in Italy, bigger than Alitalia, and the largest airline in the UK, bigger than BA and

EasyJet (Airline Business, 2009).

Consequently, if it had not been for the Ryan family‟s financial resources, Ryanair could have

been used as a case study of how lack of clear strategic direction and poor management

ultimately leads to failure as opposed to the success story the company is today.

Additionally, Ryanair is the most cost-conscious and profitable airline in Europe (Calder,

2008) due to Michael O‟Leary‟s ability to implement and sustain their low-cost strategy.

However, due to rising oil prices and the financial crisis, the airline has been less profitable in

recent years as shown in table 4.1 below.

Table 4.1 Profit and Loss 2003-2009 ($ millions)

(Source: Citi Investment Research & Analysis, 2002)

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As the table above shows, Ryanair‟s revenue has grown more than 400% during the last 7

years, however in 2009 it ended in a loss of US $ 259 million. However, in the years to

come, the company is expected to turn their losses into a net profit of US $ 373 in 2010

(Butcher et al., 2010).

In conclusion, Ryanair‟s financial resources are valuable as they initially allowed the

company to re-establish themselves as Europe‟s first low fares airline. Moreover, the

company‟s financial resources has given the company an upper hand compared to potential

new entrants, since the industry is highly capital intensive, as argued in the industry analysis.

Accordingly, leasing or buying aircraft and skilled staff to run the airline are high investment

cost, which can be a difficult barrier to overcome for many new entrants (ibid). Accordingly,

this resource is rare as it is not held by a large number of firms. In addition, it can be difficult

for new entrants to make a profit in the short run in this industry since fixed costs and

operating costs are high, while Ryanair forces prices down. Moreover, as Ryanair‟s financial

resources initially come from the Ryan family, they are built on unique historically

conditions, thus making them difficult to imitate. Accordingly, this makes the resources

imperfectly imitable. Moreover, there is no substitute for the required financial investment

cost required to enter and operate in this industry.

In conclusion, the financial resources have played a significant role in creating a competitive

advantage for Ryanair, since the resource lives up to Barney‟s 4 attributes in order to be a

source of competitive advantage, i.e. valuable, rare, imperfectly imitable and non-

substitutable.

Core Competence

Ryanair‟s physical resources i.e. its geographic location, website, aircraft and access to fuel

are like most other physical resources typically imitable in themselves (Barney, 1991)

Accordingly, if one firm is able to purchase the necessary physical resources in order to

implement some strategies, then other firms should be able to purchase the same physical

resources. On the one hand, this implicates that physical resources cannot be a source of

competitive advantage. On the other hand, Barney (1991) argues that it often requires socially

complex firm resources in order to exploit physical technology in a firm. Accordingly, even

though several firms may possess the same physical technology, it might only be one of these

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firms that possess the social relations, culture, traditions etc. in order to fully exploit this

technology in implementing strategies (Wilkins, 1989 cited in Barney, 1991). Obviously, as

Michael O‟Leary is not subject to imitation as well as being valuable, rare and the fact that no

substitutes exist, Ryanair may obtain a sustained competitive advantage from exploiting its

physical technology more completely than other firms, even though competing firms do not

vary in terms of the physical technology they possess.

Taking this argument further, Ryanair can be said to have the potential of possessing a core

competence in terms of Hamel & Prahalad (1994). Accordingly, a core competence is the

collective learning in the organization, especially the coordination of production skills and the

integration of technologies. O‟Leary‟s knowledge within cost reduction gathered through the

past 20 years, becoming an integrated part of Ryanair‟s culture, brand and traditions, has

facilitated the sophisticated technology that supports the management and marketing

operations.

However, in order for this competence, i.e. O‟Leary‟s knowledge within and constant

adherence to cost reduction, to become a core competence is has to 1) provide access to more

than one market, 2) give a significant contribution to the end product/products and 3) be

difficult for competitors to imitate (Hamel & Prahalad, 1994).

Regarding the first criterion, it is argued that Michael O‟Leary has been fundamental in

negotiating the favorable contracts and circumstances in order to keep costs lower than its

competitors in all the markets they have entered. Accordingly, this resource lives up to the

first criterion. Should they be successful with future plans of a transatlantic route as presented

in chapter 4 (4.2.4.4), this also applies to the first criterion. Regarding the second criterion,

the competence is argued to give significant contribution to the end products, as it is precisely

this knowledge within cost reduction that has contributed to Ryanair‟s low-cost offerings and

which enables the company to consistently lower prices. The third criterion, as discussed

previously, is difficult for competitors to imitate as it is an intangible asset.

Accordingly, Ryanair possesses a core competence, as O‟Leary‟s knowledge within cost

reduction lives up to the three criteria and our three interviews confirm this argument. Jacob

Pedersen argues that, “Well, Ryanair carries their customers cheaper than their competitors

because they have the competencies to do this. They have a fast turnaround which involves

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complex processes to succeed in order to get it all to work out. Ryanair has invented a

concept which can be rolled out and where O‟Leary is the figure head” (Interview with Jacob

Pedersen, CFA senior analyst). Moreover, Per Hvid argues that, “O‟Leary can decide

everything, in comparison to conventional airlines, whose processes is a drag on them.

Compared to other low cost airlines, they definitely have a core competence – they can do

something which others cannot” (Interview with Per Hvid, Head of Foreign Equities). Joe

Gill argued that Ryanair core competence is, “Their excellent management team with O‟Leary

in the front – they are consistent and do not compromise in cost cutting. No competitor can

match their ability to get the cheapest prices in the market.” (Interview with Joe Gill,

Director of Equity Research).

Nevertheless, a future threat is that their core competence becomes their „core rigidity‟(Tidd

et al., 2005), when Michael O‟Leary eventually leaves the company. According to him by this

time, the company will not need him anymore “Our growth and airport deals are handled by

the wider management team that doesn't need me anymore. I think that at a certain point,

once you've got those last big conquests: Dublin, Stansted, aircraft, it's the right time for me

to go because Ryanair needs to change from being a cost-aggressive, confrontational airline

into being a more corporately, caring, sharing company by getting rid of the hated chief

executive." (Michael O‟Leary in Airline Business, 2009).

Continuity

As argued in the business model proposition, continuity along the generic strategy, resources

and core competence is essential in order for a firm to sustain a competitive advantage.

Without continuity, the company will lack strategic direction, thus making it difficult to

develop “uniqueness” and accordingly survive in the long run. As argued by Porter (2001),

frequent corporate “reinvention” is often a sign of bad strategic thinking and will most likely

lead to failure. Ryanair has, as shown in the previous analysis, benefitted greatly by pursuing

and sustaining their low cost strategy since 1990. In addition, this has shown to be a value

creating strategy (Barney, 1991).

The fact that Ryanair initially failed with their low cost strategy shows evidence of lack of

continuity of direction. At this point, Ryanair offered the lowest prices compared to its

competitors on one hand, while not focusing on cost reduction on the other. When the

company did not have continuity of direction, they did not possess any unique skills or assets,

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and their reputation among customers was unclear. Consequently, continuity of direction has

been essential for Ryanair‟s success for the last 20 years, as shown in the previous analysis.

As a result of continuity of direction, Ryanair has obtained economies of density, pressure on

workforce, high load factor, standardized fleet and service, public finance and dynamic

pricing. Moreover, Ryanair‟s physical and human resources have enabled the company to

reduce cost by keeping focus on their low cost strategy.

The roots to their continuity of direction, lie in the company‟s core competence which is

argued to be O‟Leary‟s knowledge within cost reduction. Accordingly, Ryanair‟s position as

Europe‟s most profitable, lowest cost scheduled airline has been sustained so far, as their

competitors have yet not succeeded in duplicating the benefits of their low-cost strategy. In

conclusion, Ryanair has in terms of Porter (1996) managed to establish and preserve a

difference from its rivals, which has allowed the company to outperform competitors.

4.2.3 Components from the Business Model literature

As depicted in the business model proposition (figure 3.2), the value network consists of

suppliers, partners and customers, and, as argued previously, the value network is a central

component of the business model proposition, as this is where taking advantage of resources,

capabilities, and industry positioning makes unique relationships. To begin with, we will

analyze Ryanair‟s relationship with the actors in the value network. Hereafter, we move on to

the component “openness” in order analyze the extent to which Ryanair operates an open

business model. After this, we move on to the component “continuous change and

experimentation”, in order to analyze the extent to which Ryanair has been able to change and

adapt their value network and thus sustain their competitive position.

The analysis should contribute to our understanding of the company‟s way of doing business,

in the sense that it helps reveal the entire system that the firm employs for providing

consistent value to customers while earning a profit and benefiting its broader stakeholders

(Davenport et al., 2006). These benefits derive in part from the fact that, as proposed by Amit

& Zott (2001), a business model is a crucial source of value, not only for the firm itself but

also for suppliers, customers and partners. Also, we should be able to see how the application

of firm specific core competencies, capabilities, and positional advantages create unique

relationships in the value network, which are important to differentiate Ryanair from the

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competition (Shafer et al., 2005). Furthermore, when these capabilities and resources are

considered as a bundle, and not as individual factors, they become harder to imitate, harder to

transfer and more complementary (Schweizer, 2005), hence contributing substantially to the

company‟s competitive advantage.

Suppliers

Cost-containment and operating efficiencies are key elements in Ryanair‟s pursuit to firmly

establish itself as Europe‟s leading low-fares airline. Obviously, the airline‟s choice of

suppliers plays a major part to this end (Interview with Joe Gill, Director of Equity Research).

In the following, we will analyze relations with the network of suppliers who provide major

contributions to Ryanair‟s low-cost strategy. Ryanair‟s relations with and choice of their

supplier network contributes to a very high degree to create a unique combination of what

Morris et al. (2005) call the foundation level of the business model. While the foundation

level includes the product as such, the choice of market segments, growth models and other

factors that are easy to replicate, the proprietary level is where interaction occurs, hence

creating a unique combination leading to sustainable advantage (Morris et al., 2005). As the

following analysis will show, Ryanair‟s supplier network allows the airline to develop this

proprietary level in a way that lets the airline deliver some of the characteristics that make it

industry leader, e.g. the high-frequency flight schedule, flight operation bases and airport

locations, on-time arrivals, aircraft models and growth potential.

Airports

As concluded earlier, Ryanair‟s focus on secondary and regional airports is a valuable

resource. The relationship with and operation from these airports in and around major cities

and travel destinations has major cost-saving consequences and it assists Ryanair in the

achievement of the best customer service performance in the company‟s peer group (Ryanair

Holdings PLC). These airports are less congested than major airports and consequently,

deliver more precise departures, less aircraft time spent at gate, and competitive airport access

and handling costs. When possible, the airline chooses less expensive gate locations and

outdoor boarding stairs as opposed to jetways. Other operating expenses and limits to the

number of take-offs and landings are also avoided by the choice of airports.

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When benchmarking against the competition, the choice of airports is said to help improve

some of Ryanair‟s key performance indicators, for example the so-called “on time”

performance, i.e. arrivals within 15 minutes of schedule:

Year

Airline

2003 2004 2005 2006 2007 2008 2009

Ryanair 92.5% 93% 89.4% 81% 85% 88% 88%

Lufthansa 86.5% 87.1% 79.3% n.a. 81% 81% 84%

Air France 72.4% 88.3% 80.5% 74% 80% 84% 84%

easyJet 71.7% 88% 78.3% 73% 73% 80% 71%

British

Airways

79.3% 82.6% 74.2% 67% 70% 58% 78%

Alitalia 67.3% 86.8% 82.5% n.a. n.a. 84% 76%

Aer Lingus n.a. n.a. n.a. 72% 79% 72% 73%

Table 4.2: On time performance for Ryanair and principle competitors3:

Also, because there is little congestion at secondary locations, the airline can have its planes

back in the air within 25 minutes of landing, and this allows Ryanair to operate two more

flights a day per plane compared to competitors using major hubs (Capell et al., 2001).

In general, according to the airline, the volume of passenger traffic delivered by Ryanair also

allows the company to negotiate favorable contracts (Interview with Joe Gill, Director of

Equity Research). This is, of course, because airports – like all other businesses – are always

looking for attractive customers. Airports realize that hosting home carriers with good

operating results and feasible growth plans can be crucial to the airport‟s own success

(Harbison, 2006). Airport hubs compete with other facilities for passengers and service, and it

has great impact when a city is considered a destination point or point of origin. Industry

liberalization, which has already occurred but will continue for years to come, is changing the

way airlines are using airports, and one effect is an immense growth in the point-to-point

service that Ryanair delivers as opposed to the transfer traffic common to FSC (ibid).

Liberalization also means a shift in power balance in the sense that airlines continuously

obtain a greater influence on which airports to operate from and at what frequency, something

3 Numbers compiled from Ryanair‟s annual reports. Statistics are Ryanair‟s and Association of European

Airline‟s. Earliest available data is from 2002.

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that has been imperative to the growth of Ryanair and other low cost airlines, and this can be

exemplified by recent infrastructure additions to airports in Geneva and Singapore, areas of

wealthy communities, adding austere, bare-bones terminals to attract LCC‟s and

accommodate their cost-policies which favor only basic facilities (ibid).

In fact, a new market for “low cost airports” has emerged as a consequence of the profit

potential for regional airports willing to accommodate efficiency and cost structure to attract

the low cost airlines (ELFFA, 2004). Attraction of airlines such as Ryanair and others

carrying a high volume of passengers increase both direct income from the airlines but also

income from related commercial revenue directed from an increased businesses activity in the

areas of terminal shopping (car rental, restaurants, banks, etc.), car parking, shuttle

transportation, and airport advertising by hotels, tourist attractions and others targeting the

travelling segment (ibid). To give an example of the value that a low cost airline can add to an

airport as a consequence of increased passenger numbers, Glasgow Prestwick Airport, a

Ryanair base, experienced its enterprise value increasing from €2.9 million in 1992 to €48

million in 2001 (ibid). During this period there was an increase in passenger numbers from

10,000 to 1.3 million with the vast majority contributing by traffic from Ryanair.

Aircraft Equipment

Ryanair purchases aircraft from a single supplier, namely Boeing (Ryanair Holdings PLC,

2010). Ryanair speculates that the terms of the contract with Boeing are “very favorable”

(ibid). This assessment may be more than mere speculations, though. In 1997, David

Bonderman CEO of investment fund Texas Pacific Group and previously involved in the

turnaround of American airline Continental Airlines, became chairman of Ryanair. He added

a certain credibility to the company, and according to the business magazine BusinessWeek,

this was a key to the negotiation of contracts including savings close to US $15 million off the

US $45 million price per aircraft (Capell et al., 2001). For Boeing, a relationship the size of

the one with Europe-based Ryanair was an important step in the competition with the

European competitor Airbus (ibid).

Boeing, however, won Ryanair as a customer only after a close battle with Airbus (Airline

Business, 2009). And even if the company stresses that it is an important part of their cost

minimization to have only one supplier of aircraft equipment, relations with Airbus could be

closer than they appear. Ryanair has on several occasions made bids to acquire a long time

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fiend and Irish national airline, Aer Lingus. Should the company succeed in purchasing the

latter mentioned, which they already own part of via a large stock holding, this would make

them an Airbus customer by default (ibid). Adding to this, Ryanair announced in December

2009 that it had unsuccessfully terminated negotiations with Boeing regarding an order of

new aircraft (Ryanair, 18 December 2009). In October 2009 the airline said it wanted to

complete an order for 200 aircraft before the year-end with Boeing or, alternatively, Airbus if

they offered a better deal (Sandle, 2009). The aircraft were planned for delivery after 2012,

when Ryanair‟s current delivery stream will run out. Now that the company could not

conclude any negotiations, O‟Leary has announced that Ryanair will scale back investment in

planes from 2011 and, hence, reduce growth and expansion plans and in stead distribute the

consequent cash build up to shareholders between 2012 and 2015 (Kollewe, 2009). This turn

of events has had analysts quarreling whether we are witnessing an end to the era of fast

growth for the low cost airline carriers or not (ibid). Others speculate whether there is an

actual possibility that Michael O‟Leary can turn the aircraft market upside down by ordering

additions to his fleet from producers Embraer and Bombardier, which industry experts say

are making an increasing challenge to the duopoly of Airbus and Boeing (Centre for Asia

Pacific Aviation (CAPA), 2010). Though this would require Ryanair acceptance of higher

costs and complexity in terms of operations, it might, on the other hand, be offset by the

possibility of entering and building new markets with these types of plane (Schon-land,

2009).

Fuel

As mentioned, fuel accounted for 45% of Ryanair‟s operating costs in 2009 (Ryanair

Holdings PLC, 2009). While this specific financial year may present unusually high oil

prices, fuel is always a substantial cost for the airline, which – as opposed to competitors -

maintain a policy of never imposing fuel surcharges to their ticket prices. Hence, when oil

prices go up, costs must be reduced in other areas of business. However, oil prices are hard to

predict and in 2005 prices rose substantially, which made Ryanair opt to start taking positions

in the crude oil market to accommodate the financial risk of future fuel costs (Lea, 2009). A

way to do this is by hedging, which brings the benefit of stability (Dunn, 2009). There are

essentially two views on hedging, which decides how an airline acts (Reals, 2008):

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1. The view that hedging is a strategic device and a type of insurance policy, which

enables the company to foresee fuel prices exactly. This leads the company to

implement long-term fuel hedging strategies and has the benefit of avoiding severe

shocks to the cost base. However, it also bears the risk of paying too much, if prices

fall drastically during the period for which the company has fixed oil prices. In this

category, US carrier, and Ryanair role model, Southwest Airlines has long been

renowned for a successful hedging strategy which is valued to be important in the

company‟s position as one of the few profitable US airlines. In spite of this, they have

had to adjust aggressively in recent years‟ collapsing markets and have also incurred

heavy losses (Dunn, 2009).

2. The other view is speculative and sees hedging as a tactical device. It is a short-term

evaluation of the price level in the market and trading is done on the basis of volatility.

Hence, the speculation involves trying to assess whether there is a low-price market or

not, and then hedge positions accordingly. Ryanair is the example of a company

which has gambled on oil prices and allowed its hedges to run out because they

believed prices went too high (Reals, 2008).

This explains why Ryanair‟s hedging program has been off for a period, and then on again,

and the company‟s hedging transactions creates some turmoil. Numerous business articles

and investment banks point to the fact that Ryanair has had bad luck in transferring the risk of

unpredictable fuel prices to its hedging positions. One article reports of €150 million in lost

profits in one financial year due to Ryanair‟s unfavorable hedging positions (Lea, 2009).

Another business correspondent reports how Ryanair‟s chief executive O‟Leary confessed

that he “screwed up” the company‟s fuel strategy by remaining largely unhedged through a

period of rising oil prices in the summer of 2008 (Robertson, 2009). A Morgan Stanley report

shows that Ryanair is currently heavily hedged for FY 2011 but no further (Butcher et al.,

2010). The report also assesses that the development of fuel prices is likely to put pressure on

the airline‟s margins, unless they are able to push surcharges onto customers through ticket

prices.

Skilled Employees

Although savings on crew costs are generally assessed to account for only 3% of the cost

advantage of low fares airlines, employment in the sector is a major issue in the public

because of allegations of lower standards of pay, benefits, and working conditions (Kaberry,

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2007). This is also the case for Ryanair. But with CEO O‟Leary‟s socalled anti-union

strategies on the one hand these discussions are highly political (International Transport

Workers Federation (ITF), 2002; (Interview with Per Hvid, Head of Foreign Equities). On the

other, with labor unions‟ pressure via its traditional labor strength in the airline industry (Citi

Investment Research & Analysis, 2002), it is hard to decipher the nature of the relations

between Ryanair‟s employees and the company. According to one industry magazine,

“[v]igorous internal pilot debate about employment and operational issues is common to all

airlines. It is just a matter of degree” (Learmount, 2006).

Yet, studies of the social benefits of low fares airlines in Europe go against the before

mentioned allegations as they document how the pay rates and terms of employment are both

attractive and competitive (Kaberry, 2007).

The following benefits are offered to Ryanair‟s employees (ibid):

- Combination of basic pay and payment based on number of hours flown

- Average salary of €52,499

- Entitlement to share options

- Pension scheme/stakeholder pension scheme

- Travel concessions to staff and relatives

- No overnight stays away from home base

- Certainty in shift roster (5/4 = five days on, four days off)

- Training opportunities

- Rapid promotion possibilities (Pilots typically advance to Captains after only three

years compared to ten years at FSC)

- Opportunities to engage in company charity work

For cabin crew, who are not regarded as skilled employees, an added benefit is the

transferable skills they receive for example in the sense of sales training (ibid). Ryanair relies

greatly on these skills and employees, as these are imperative to the generation of ancillary

revenues comprising around a fifth of the company‟s total revenue. For cabin crew, the sales

skills can be used in a different job if they choose to pursue other careers some time.

Furthermore, the roster; or shift pattern; which applies to Ryanair pilots proves highly

productive, and is also an “excellent” combination of stability, rest opportunity and duty

limits when evaluated by industry specialists and aviation authorities (Learmount, 2006). This

assessment is applied to the 5/3 system, which means that pilots fly five days and are off duty

for three days. But because crews reach their flight time limit before the year-end, most bases

have now adopted a 5/4 system, which is even more popular. As Ryanair operates under Irish

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authorities, this is a rostering system that all competitors (e.g. easyJet) are not able to imitate

(ibid). Furthermore, Ryanair‟s flight network is short-haul and it operates from several bases

across Europe, using locally based crew and aircraft. This means that pilots return home after

a workday instead of having to spend the night at other destinations. The downsides to

Ryanair pilots are the fast turnarounds, which mean they have very limited time to leave their

seats between flights, and also the congested, complex and multinational airspaces that they

are operating in. This workload intensity has an effect on pilot fatigue (ibid).

As mentioned in section 4.2.2.2, though Ryanair relies heavily on the high productivity of its

staff (ELFFA, 2004), this is usually an effect of the above-mentioned more efficient rosters,

fewer overnight stops, and remuneration packages based on productivity performance

(Kaberry, 2007). Despite the perception that there is a high degree of operational pressure on

the crew of an LCC airline, there is no evidence for this and, furthermore, overall flying hours

are strictly regulated (ibid). Adding to this, an aircraft fleet as young as Ryanair‟s features the

latest flight-deck technology and equipment designed to reduce pilot workload pressure.

Third Party Contractors

Services such as passenger and aircraft handling, ticketing etc. are outsourced to third party

contractors, when Ryanair‟s management believes that this is more cost efficient (Ryanair

Holdings PLC, 2009). Competitive rates are obtained by negotiating multi-year contracts at

fixed/inflation-adjusted prices. This way of viewing business activities,- i.e. if a step in the

value chain is better performed by the market and does not belong to the core competencies of

the company, the activity is outsourced,- is typical for the Orchestrator Model, which is the

business model with the best long-term potential to become successful (Schweizer, 2005).

This argument is further elaborated in the following section where Ryanair‟s relationship with

business partners is analyzed.

Partners

Ryanair works with business partners, playing a key role in the company‟s generation of

ancillary revenue (Interview with Jacob Pedersen, CFA senior analyst), i.e. revenue from

services and activities that are connected with delivery of their core product. With their strong

focus on stripping the product down to basics and selling only the flight ticket, and then

constantly working to develop new sources of revenues, Ryanair has introduced a new logic

to the traditional airline business. As mentioned above, Schweizer (2005) argues that this is

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typical for the Orchestrator Model. The Orchestrator Model focuses on few core steps of the

value chain and gain competitive advantage from superior coordinating capabilities and

management of the network of partners and suppliers. Ryanair has an active relationship with

both suppliers and partners, and constantly works to obtain the most cost-effective agreements

as will be seen in the following analysis of Ryanair partners. See also section 4.2.4.1 for an

analysis of Ryanair‟s network of suppliers.

Ancillary Services and Other Sources of Revenue

Ancillary services and other revenue generating activities include in-flight sales, car rental,

and insurance, but are not limited to these. Ancillary services are provided in order to reduce

per-unit costs; and, hence, contribute to delivering airline passengers the lowest fares possible

(Ryanair Holdings PLC). According to a Morgan Stanley report, development of ancillary

products is a key value driver for Ryanair, because revenues from these services and activities

generate higher margins than the core business (Butcher et al., 2006). In the financial year

(FY) 2009, ancillary services provided for 20.3 percent of Ryanair‟s total operating revenues

(Ryanair Holdings PLC, 2009) and as seen from table 4.3, supplementary business has

provided continuous enhancements to the company‟s operating results over the years.

Table 4.3: Total, Scheduled and Ancillary Revenue in Ryanair

Source: Own illustration, figures collected from Ryanair Annual Reports

Ryanair works with a vast array of partners offering ancillary services (See appendix 1). One

of the airline‟s biggest partners is Hertz Car Rental, handling all Ryanair‟s car rental services

marketed to passengers. Ryanair also has agreements with credit card issuers and promote

special Ryanair-branded Visa and Mastercards. The latest ancillary service added to the

airline‟s portfolio is in-flight communications service.

Financial

Year

Revenue

Type

2001

(€’000 /

%)

2002 2003 2004 2005 2006 2007 2008 2009

Total 487 100 624 100 842 100 1,074 100 1,319 100 1,692 100 2,236 100 2,713 100 2,941 100

Scheduled 432 89 550 88 731 87 924 86 1,128 86 1,433 85 1,874 83.8 2,225 82 2,343 79.7

Ancillary 54 11 73 12 110 13 149 14 190 14 259 15 362 16.2 488 18 598 20.3

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Partner On Air provides mobile voice and data solutions for aircraft, which enables

passengers to use mobile phones and other devices while they are on board the plane. The

table below shows a breakdown of the airline‟s ancillary revenue to highlight how the various

services contribute. An explanation of the items is found below table 4.4.

Table 4.4: Breakdown of revenue generated by ancillary services and activities

Source: Ryanair Holdings PLC, Annual Report 2009

The “Non-flight Scheduled” revenue, which accounts for more than two thirds of total

ancillary revenue, is comprised by excess baggage charges, debit and credit card transaction

fees, sales of rail and bus tickets, hotel accommodations, and travel insurance. “Car Rental” is

self-explanatory, while “In-flight Sales” refers to food, beverages, and other in-flight

offerings. The item called “Internet-related” is primarily commissions from products sold on

websites linked to Ryanair‟s main webpage.

While contract details for the partnerships that Ryanair engages in are not readily available,

there are indications that Ryanair holds the upper hand. Most partnerships entail the exclusive

right to sell and market a product directly through the Ryanair website, which offers a

substantial traffic load. Often it appears that the partnerships do not offer particular price

reductions to Ryanair customers, but just ease access to travel extras. Since the partner

company usually gains exclusive access to Ryanair‟s customers, the partnership bears more

the characteristics of being a sort of exclusive advertising deal. For this lucrative deal, the

partner company also pays a substantial amount to Ryanair; at least this is what is suggested

by travel bloggers and other commentators. Partnerships usually run 5 years and are then

renegotiated. Often this leads to Ryanair‟s negotiating a better deal by choosing a different

partner. And sometimes, relationships end unhappily. Previous hotel provider, Expedia, who

had exclusive rights to sell hotel accommodations on Ryanair.com (Associated Press (AP),

2008) and access to Ryanair‟s 58 million passengers (Ryanair, 14 October 2008), ended

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prematurely in 2008 as a result of Expedia‟s alleged breach of payment terms. The £4million

dispute was settled out of court in February 2010 (Cowen, 2010).

The aim with Ryanair‟s business partnerships, advertising, and the airline‟s putting a price on

everything except the actual flight ticket is, according to CEO O‟Leary, to make flying free

one day (Maier, 2006) - or at least to lower fares constantly - with the primary revenue stream

coming from ancillary services and activities (Airline Business, 2009).

Customers

“[Mr O'Leary's] cavalier treatment of passengers left stranded by flight cancellations

and the yelling of obscenities at people who, in sometimes tragic circumstances, make

the mistake of asking for a refund have given Ryanair a deserved reputation for

nastiness.”

(The Economist, 2007)

“I think half our passengers would like to see me dead and buried, actually, and

eventually they'll get what they want. Frankly, I couldn't care less as long as they fly

with us."

(Michael O‟Leary, Ryanair‟s CEO, 2009)

Business practices in Ryanair are testament to a consistent adherence to constant cost-cutting,

no-frills, no-extras and no-special treatment elements, which all form part of the overall low-

fare airline strategy. And while customers and media commentators often find awe and

astonishment in, for example, this “cavalier treatment of passengers”, as quoted above, the

adherence to a basic set of operating rules may be central to the success of the airline. As

argued by Morris et al. (2005), company guidelines ensure that the business model and its

unique application are reflected in ongoing strategic actions. Consistent adherence to these

basic principles is what may distinguish companies with otherwise similar business models

(Morris et al., 2005). Ryanair‟s approach to customers in general and CEO Michael

O‟Leary‟s almost religious devotion to the company‟s cost leadership strategy in specific are

reflections of this consistent adherence as the following analysis will show.

Customer Segmentation and Customer Service

Ryanair makes no attempt to distinguish between different passenger groups as the company

takes an “egalitarian” approach to its customers: Ryanair‟s target market includes all groups

(Lawton, 2002). It is general characteristics of the low-fares airlines that they do not just cater

to leisure passengers, but to a very high degree they also serve business travelers who simply

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wish to pay lower fares or who take advantage of the increased choice of routes from regional

airports (Kaberry, 2007). All passengers, including business travelers, students, visiting

families and relatives, pay the same price and share the same non-assigned seating

arrangement. This can be viewed in stark contrast to the traditional airlines‟ “segregated”

approach dividing passengers into different groups and offering special loyalty programs and

different service levels. By way of their low-fare service, Ryanair has inducted a growth into

the total air market and continues to do so by reaching passengers otherwise unable to travel

by air due to either geographical location or economic constraints (Lawton, 2002). This

ability to create a new market matters to firm successfulness and when coupled with a cost

leadership strategy, as is the case with Ryanair, it enhances firm performance (Zott & Amit,

2008).

However, it is the paradox of Ryanair that, in spite of the huge success of the airline, its

proven ability to live up economic prospects for the outskirts of Europe, and the conquest of

bringing the traveling mode of flying into the reach of people of even limited means, the

company‟s reputation in the realm of customer service is, to say the least, unfavorable.

Ryanair is notorious for its aggressive and confrontational attitude (Interview with Joe Gill,

Director of Equity Research), but in a strange way, this seems to be indistinguishable from the

almost religious adherence to the immensely successful method of constantly cutting costs.

Yet, even if O‟Leary recognizes that customers generally have very little sympathy for him

and his business methods, he describes Ryanair‟s customer service as “industry leading”

(Ryanair Holdings PLC, 2009), when measuring on the key elements that, according to

Ryanair, comprise customer service: Low fares, punctuality, fleet quality, number of missing

bags, and flight completions (ibid). In all of these areas Ryanair outperforms competition and

delivers the value that customers are looking for. As previously mentioned, the airline‟s

website is also the most popular and easy to use according to customers. Perhaps, customers

return to Ryanair because they get used to how it works, as argued by Jacob Pedersen

“Customers accept the terms and return.” (Interview with Jacob Pedersen, CFA senior

analyst).

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Customer Choice and Active Involvement of Customers

As stated, it is part of Ryanair‟s low-cost strategy to cut costs on customer service compared

to conventional airlines. On short-haul flight routes it is possible to offer less “frills” such as

in-flight meals and movies, and it is the elimination of these excess services, which are

otherwise expected by customers on longer flights or when flying conventional airlines that

allow Ryanair to offer low fares and frequent service (Ryanair Holdings PLC, 2009). In this

part of the company‟s value creation, customers are actively involved. One of the focal tools

for Ryanair to do this is by offering their customers a choice. That means, in the words of

Ryanair spokesman Stephen McNamara (Ryanair, 12 March 2009):

“[I]f you don‟t want to pay for food – don‟t buy it, if you don‟t want to pay checked in

bag charges – don‟t bring checked in bags, if you don‟t want to pay handling charges

– then just use Visa Electron entirely free of charge”.

Ryanair is constantly looking to increase the array of choice for the customer and in order to

examine fully the possibilities of increasing the company‟s ancillary revenues, which are then

applied to the lowering of air fares, customers have been invited to submit their most

ingenious ideas on the company‟s website with the view to winning cash prizes (ibid). Some

ideas, however, such as charging for toilet paper with the face of Ryanair‟s CEO on it,

charging people for using the oxygen masks, and introducing polls for passengers to decide

whether Ryanair and easyJet‟s CEOs should sumo wrestle in order to settle the fight over

flight punctuality statistics, have travel bloggers and other commentators speculating that

these are publicity stunts more than actual attempts to involve customers in the company‟s

product development process.

However, other measures which Ryanair has introduced and had customers vote for on the

website, could arguably be seen implemented, given the company‟s track record of

unorthodox business methods in the industry. These include introducing a “fat tax” for

extremely overweight passengers who “invade” the space of fellow flyers (Ryanair, 22 April

2009), and gauging demand for a “vertical seating” program for passengers who are willing to

stand up during short flights with the incentive of flying free of charge or pay 50% less than

seated passengers (Ryanair, 9 July 2009).

Ryanair‟s relationship with customers may need to change, though. When all the big

conquests in cost-cutting have been achieved, Ryanair will have to morph into a more

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“corporate, caring, sharing company”, according to speculations by CEO O‟Leary (Airline

Business, 2009). With a huge customer base and strong customer loyalty it is his opinion that

Ryanair needs to be “a more loved, caring, attentive airline”. This argument is enforced by

Joe Gill, who argues that the company might have to change, when O‟Leary eventually

leaves, but not before “O‟Leary will not change, that is impossible. (…) But the strategy will

remain with a focus on low cost” (Interview with Joe Gill, Director of Equity Research).

Openness

In this section, we will analyze the extent to which Ryanair operates an open business model

(Chesbrough, 2007b). The analysis considers how Ryanair uses outside ideas and

technologies in its internal product and business development, and how the company allows

inside business intelligence to be commercialized externally.

Use of Outside Ideas and Technology

"Ryanair is the best imitation of Southwest Airlines that I have seen"

(Herbert D. Kelleher, founder of Southwest Airlines)

Companies succeed when they choose an effective business model and execute it superbly

(Linder & Cantrell, 2000). One of the most radical ways in which Ryanair has done this is by

applying an outside idea in their business development, i.e. the direct replication of Southwest

Airlines‟ low-cost, low-fares model. Because while it is certainly new to Europe, and

represents a radical difference from earlier times‟ heavily regulated industry, the airline model

employed by Ryanair is not the company‟s own invention (ELFAA, 2004). The development

of the low-fares airlines sector in Europe is a replication of the American equivalent.

Following deregulation and liberalization of the air transport market in the 1970ies in the

United States, Southwest Airlines re-launched itself as the original low fares airline. The

airline was the first to introduce the airline model, as it is known today, and they achieved a

remarkable growth through pursuing low costs and high efficiency in every aspect of the

business.

Yet, even if Ryanair was not the inventors of the low-cost and low-fares model, it was the

first European airline to copy it and is perceived as the original European low fares airline

(ibid). In 1989, when Ryanair was performing poorly and losing a lot of money, O‟Leary –

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who was not yet CEO of the company – advised the airline‟s founder, Ryan, to shut it down

(Capell et al., 2001). But instead Ryan chose to set up a meeting with his long-time friend and

founder of Southwest Airlines, Herb Kelleher. The latter, in turn, made a lasting impression

on O‟Leary, who concluded that provided full management control, he could copy the

Southwest model.

The figure below summarizes the various advantages which lead to the low fares and high

volumes central to the success of Southwest Airlines and, following their example, other

American low-cost carriers.

Figure 4.1: Low-cost model advantages

Source: ELFAA (2004)

Another outside idea that Ryanair has benefited greatly from, is the logic behind open source

software, where the product, i.e. the software, offered is free, and money is made from value

adding services (Williamson, 2008). Ryanair has a mission to grow its ancillary revenues to a

size that allows the company to constantly offer lower fares and with the aim to offer all

passengers free seats one day (Maier, 2006). The airline has successfully replicated and

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translated this idea across industries and has experienced a continuously growing revenue

stream from supplementary services (cf. table 4.3 in previous section). One of the primary

ways in which the company does this, is by working closely with outside partners and sharing

the revenue generated by the thousands of passengers travelling with the airline and

purchasing partner products marketed through Ryanair‟s website and on board the plane.

In general, Ryanair systematically takes advantage of working with business partners to

exploit and capture value from ideas that are not developed internally by the airline (see

section 4.2.4.2). Its various partnerships let Ryanair appropriate a portion of the value created

by innovative companies, in many cases even without bearing any of the business risks

involved. For example, Ryanair has a partnership with Booking.com (see appendix 1) who

has successfully used informational advantages to create a new layer in the traveling industry

value chain and, can therefore, be characterized as a Market Maker (Schweizer, 2005).

Booking.com pays a fee to Ryanair for an exclusive five year partnership to handle hotel

services directly via the airline‟s website. Hence, Ryanair can choose the most successful

partner and product without taking any risks in the innovation process and business

development, and yet, the company can still add value to its own product by offering travel

extras, competitive accommodation prices, and convenience to customers.

Ryanair works with business partners to create value-adding services, and it also outsources

activities to third parties. However, according to an industry analyst, and as opposed to the

rest of the airline industry, Ryanair does not see strategic partnerships or strategic

development as the reason for this open attitude towards external contributions to the business

(Jenner, 2009). Instead, it looks at the relationships from a pure cost perspective and target its

partners allowing the company to save or make money. But bearing this in mind, Ryanair is

acutely open to outside technology that enables it to innovate, focus, and enhance operations.

For example, in 2008 the company signed a deal with an IT company to deliver on-board

sales technology, providing Ryanair with electronic point of sale devices to be used by cabin

crews in-flight (Thomsom, 2008). The introduction of this technology enabled the company

to work more effectively, launch more products and, thus, increase revenues. In another cost-

saving exercise, Ryanair has over the years eliminated the use of commission-making travel

agents by switching computer-reservation systems and later introducing the Ryanair.com

website (Capell et al., 2001).

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External Commercialization of Business Intelligence

At present, there are no obvious examples of external commercialization of inside business

intelligence at Ryanair. However, one of the company‟s future bold moves could be to

introduce a low cost, long-haul airline offering flights as cheap as €10 (Morrison &

Learmount, 2007). This would entail transatlantic routes from Europe to the United States

using the same underlying logic that Ryanair is built on but as a distinct venture, i.e. as a

business with a separate name and management (Morrison et al., 2007). A spin-off to the

company would be a guard against any negative influence that the new business venture could

possible infer on the well established short haul operations. A possible spin-off to Ryanair,

would not be the first to offer this product, but may in turn benefit from the substantial cost

advantages and simple point-to-point operations that established airlines do not have.

Furthermore, CEO O‟Leary expects ancillary services to be a substantial revenue driver, as

the company would be able to sell a range of products during a long flight, such as movies,

food and drinks, duty-free and other merchandise (ibid). Though he realizes that his plan will

not materialize in the current economic environment, because it is not possible to get delivery

of a full fleet of aircraft, O‟Leary speculates about a transatlantic fleet of 50-60 aircraft with

bases throughout Europe flying to 12 or 15 destinations in the USA (Airline Business, 2009).


As argued previously, continuous change and experimentation along the business model level

is essential in order to sustain a competitive advantage, since the perfect fit does not last

forever. The analysis of Ryanair‟s business model confirms this hypothesis as Ryanair has

managed to continuously change and adapt its value network in order to attract new customers

and look for new ways to generate revenue from its customers (Hvass, 2006).

As shown in the value network analysis, Ryanair‟s suppliers of airports, aircraft equipment,

fuel, skilled employees and third party contractors contribute to creating what Morris et al.

(2005) call the foundation level of the business model. Accordingly, the foundation level

allows Ryanair to develop a proprietary level where the actual interaction occurs, thus leading

to sustainable advantage (Morris et al., 2005). So, while the choice of suppliers might be easy

to imitate for competitors, it is the interaction between the company and its suppliers which

gives the company an advantage. In addition, it is the proprietary level, facilitating high-

frequency flight schedule, flight operation bases and airport locations, on-time arrivals,

aircraft models and growth potential that are argued to be difficult to imitate. Consequently,

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Ryanair‟s network of suppliers provides a major contribution to the company‟s low-cost

strategy.

Moreover, Ryanair‟s key suppliers allow the company in terms of Chesbrough (2007a) to

share both technical and business risks. For example, Ryanair‟s suppliers of airports are

highly dependent on the success of the company due to the high volume of passenger traffic

delivered by Ryanair. Accordingly, many secondary airports are willing to negotiate attractive

contracts with the company as their own survival is dependent on this relationship. Also, their

very favorable contract with Boeing reflects Ryanair‟s powerful role in this relationship.

Boeing‟s risk of losing Ryanair to their biggest competitor Airbus has given Ryanair the

upper hand in this relationship.

Ryanair‟s fuel strategy on the one hand is, as argued in the RBV analysis, a strategy that

makes suppliers anonymous, and thus neutralizes any opportunity of making this physical

resource lead to competitive advantage. On the other hand, the company‟s continuous change

and experimentation in this area has made the company gain, as opposed to competitors,

when oil prices were falling. As stated by O‟Leary, “We'll take our chances.” (Airline

Business, 2009) this illustrates Ryanair‟s hedging strategy, as well as its general philosophy

in the pursuit of continuously sustaining its position as Europe‟s lowest cost carrier.

Ryanair‟s employees are, as argued in the previous analysis, imperative to the generation of

ancillary revenues comprising around a fifth of the company‟s total revenue. Accordingly,

Ryanair relies on its skilled employees as well as on its pilots‟ productivity. However, it is

not as much its employees as such who add to the company‟s successful business model. It is

to a higher extent its continuous look for new ways of using its resources and core

competence in order to support its generic strategy, which has led to its efficient rosters, i.e.

fewer overnight stops, and remuneration packages based on productivity performance

(Kaberry, 2007), all together being difficult to imitate.

In addition, whereas the general perception is that there is a high degree of operational

pressure on the employees at Ryanair, it is argued that it is the company‟s continuous pursuit

for the latest flight-deck technology and equipment which has led to its efficient rosters, thus

giving Ryanair a competitive advantage.

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Moreover, continuous change and experimentation along the business model level is shown

through Ryanair‟s pursuit of outsourcing the business activities which are performed more

satisfactory by outside contractors and partners. As long as these activities do not belong to

the company‟s core competence, the business model has the potential of belonging to the

Orchestrator Model, i.e. the business model with the best long-term potential to become

successful (Schweizer, 2005). This argument is shown in Ryanair‟s relationship with its

partners in order to constantly obtain the most cost-effective agreement. In terms of

Schweizer (2005), this allows the company to gain competitive advantage by superior

coordinating capabilities and management of the network of partners and suppliers. In fact, as

shown in the previous analysis of Ryanair‟s partner network, ancillary revenue generates

higher margins than its core business, thus showing the contribution of openness, continuous

change and experimentation along the business model level.

In addition, Ryanair‟s continuous change and experimentation along the business model level

has the potential of making flying free one day by putting a price on anything but the actual

flight ticket.

Ryanair‟s customers play an active and critical role to this end, as they are the ones deciding

what to pay for, as opposed to conventional airlines where many services are included in the

ticket price. Accordingly, the customers are constantly challenged as Ryanair is persistently

looking for new ways to increase the customer‟s choices by increasing ancillary revenue. As

stated previously, Ryanair‟s website allows customers to submit their ideas with the incentive

of winning cash prizes. Accordingly, customers‟ ideas should allow the company to lower

ticket prices. However, it is argued that continuous change and experimentation along the

component “customer” will eventually reach a point where all big conquests in cost-cutting

are reached. As a consequence, Ryanair‟s competitive advantage as a cost leader can be

threatened, and require a change towards a more loving, caring and attentive airline, as argued

by O‟Leary.

Beside the customers‟ active role in Ryanair‟s business model, the company continuously

involves external partners in order to exploit and capture ideas which can create value for the

company. As argued by Chesbrough (2007b), a business model is likely to be very profitable

and hard to imitate, when it exploits outside ideas as opposed to only focusing on internal

core competencies and resources as the key to competitive advantage.

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In conclusion, Ryanair‟s ability to continuously change and experiment along the business

model level allows the company to speed off in a better direction while competitors continue

to follow their old direction and are in terms of Mitchell & Coles (2003)“left choking in their

dust” .

4.2.5 Performance of Ryanair‟s Business Model

As argued in the business model proposition, strategic fit is fundamental to the sustainability

of competitive advantage since it is harder to imitate a position based on a variety of related

and mutually reinforcing activities than it is to replicate single product features or processes

(Porter, 1996; 2001). Based on the previous analysis, we can now confirm or reject our

hypothesis of what leads to sustained competitive advantage, by plotting the components from

the case analysis into our chart as shown below.

Chart 4.1 Performance of Ryanair‟s Business Model (Strategic Fit)

Generic Strategy

Web-site

Human Resource

Core Competence

Geografic location

Aircraft

Fuel

Degree of coupling

Performance of Ryanair

Financial Resources

Sustained competitive

advantage

High

Low

Loose Strong Degree of coupling between components

Co

mp

etit

ive

advan

tag

e

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As shown in chart 4.1, our hypothesis of what leads to sustained competitive advantage is

confirmed. Accordingly, Ryanair‟s strategic fit is positioned in the highest level in the graph,

thus giving the company a sustained competitive advantage.

If we start with the Y axis, Ryanair is argued to possess a high degree of competitive

advantage, as the accumulated strength of its generic strategy, internal resources and core

competence is high.

As shown in the previous analysis, Ryanair has managed to pursue and sustain its low-cost

strategy since its re-launch in 1990. Accordingly, after failing with its “stuck in the middle”

strategy, the company has managed to continuously beat competitors on price. This was done

by maximizing the use of aircraft, putting pressure on the workforce, increasing the load

factor, standardizing the fleet, making favourable contracts with authorities as well as making

use of dynamic pricing. As a result, we place Ryanair‟s generic strategy on the highest level

on the Y axis.

Moreover, Ryanair‟s resources were argued to enable the firm to conceive and implement

strategies that improve its efficiency and effectiveness. Starting with its physical resources,

i.e. its geographic location, website, aircraft and fuel strategy, it was argued that none of these

resources in itself could lead to sustained competitive advantage, as purchasing physical

resources and thereby implementing some strategies, most likely can be copied by competing

firms (Barney, 1991). However, Ryanair‟s geographic location, and more specifically, its

choice of secondary airports as its bases were argued to be valuable, rare and difficult to

imitate. As choosing primary airports was argued to be a substitute to this strategy, this

resource is not positioned in the highest level in the Y axis. Furthermore, the company‟s

website was argued to be valuable, rare, and since no competitor has managed to imitate the

benefits from its website in the same way as Ryanair, it is argued to be difficult to imitate. In

addition, no substitute exists which is also valuable, rare and difficult to imitate. Accordingly,

this resource is placed in the high level in the Y axis.

Moreover, the agreement with its aircraft supplier was argued to be valuable, rare, imperfectly

imitable; but since a similar contract with Airbus could be made by a competing firm, it is

argued to be substitutable. Accordingly, we place this resource lower than the former. The

company‟s fuel strategy is furthermore placed in the lower end of the Y axis, as this resource

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did not live up to any of Barney‟s criteria. Accordingly, this resource can hardly be a source

of competitive advantage. In conclusion, Ryanair‟s physical resources are not in themselves a

source of competitive advantage.

Moving on to Ryanair‟s human resource, it was concluded that Michael O'Leary is a rare,

valuable, imperfectly imitable and non-substitutable CEO. His skills and talent to implement

and sustain a low-cost strategy is the key reason why Ryanair has been able to sustain its

position as the airline with the lowest-cost in Europe. Accordingly, this resource is placed in

the highest level in the Y axis.

Ryanair‟s financial resources were argued to play a critical role as a means to pursuit and

sustain its strategies. Accordingly, the company‟s financial resources were argued to be

valuable, rare, imperfectly imitable and non-substitutable, thus being a source of competitive

advantage, as shown in the Y axis.

In addition, it was argued that Ryanair possesses a core competence in terms of Hamel &

Prahalad (1994), which in addition facilitates the exploitation of the company‟s physical

resource in a way that makes it difficult for competing companies to benefit in the same way.

Accordingly, O‟Leary‟s knowledge within cost reduction has become an integrated part of

Ryanair‟s culture, brand and traditions and has facilitated the sophisticated and able

technology that supports its management and marketing operations. In addition, as this

competence lived up to the three criteria which were to 1) provide access to more than one

market, 2) give a significant contribution to the end product/products and 3) be difficult for

competitors to imitate (Hamel & Prahalad, 1994), we place this on the highest level in the Y

axis.

In conclusion, the strength of their generic strategy, human resources, financial resources and

core competence is high, thus confirming the importance of these components as the

foundation for competitive advantage. However, the physical resources were argued to be less

strong, as these did not in themselves fulfill the 4 criteria in order to lead to a competitive

advantage (Barney, 1991).

Nevertheless, our case study shows that the physical resources play an important role as they

are a direct effect of the strategic fit between all the other components. For example,

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Ryanair‟s website serves as a platform for the integration of the value network on one hand,

while taking advantage of its internal resources, core competence and generic strategy, thus

reinforcing its competitive advantage. Additionally, partners are promoted through the

website and customers are actively involved through the website, thus allowing the company

to continuously lower ticket prices.

In continuation of this, the X axis in the chart shows that the degree of coupling between the

components is very strong. In addition, all the components reinforce each other, and changes

in one component have a direct impact on all the other components.

By taking advantage of its resources, core competence and sticking to its generic strategy at

all times, Ryanair has in terms of Chesbrough (2007a) been able to share both technical and

business risks with suppliers, partners, and customers. As shown in the analysis, Ryanair‟s

suppliers of airports are highly dependent on the success of the company due to the high

volume of passenger traffic delivered by Ryanair. Moreover, their favorable contract with

Boeing reflects the sharing of risk.

Ryanair constantly obtains the most cost-effective agreement by acknowledging that the

business activities which are performed more efficiently by external partners should be

outsourced. As shown in the previous analysis, ancillary revenue generates higher margins

than its core business, thus showing the importance of its value network and the strategic fit

between all the components.

Moreover, the high degree of coupling between the components is shown through the

company‟s continuous obtainment of the latest flight-deck technology. Accordingly, by

taking advantage of its resources, core competence and generic strategy on one hand, while

cooperating with external partners on the other hand, Ryanair has sustained its competitive

advantage. Consequently, Ryanair‟s performance is a result of the strategic fit between

strategy and business model, as shown in the chart.

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Chapter 5: Conclusion and Discussion

In this final chapter of the thesis we return to the problem stated in the introductory part of the

study, and we formulate an answer to the main question posed there. Furthermore, we discuss

our findings and their limitations, which can also serve as a basis to look into areas of further

research on the topic of business models.

5.1 Conclusion

The main question that this thesis set out to answer was this:

How can the business model be integrated with traditional strategic perspectives in order to

better understand a firm's sustained competitive advantage?

The entirety of the study conducted in this thesis leads us to conclude that the business model

can be integrated with traditional strategic perspectives by taking views from the existing

literature on sustained competitive advantage and applying new contributions from authors

writing in the context of the business model as such. Together these insights form the basis

for an approach to evaluate firm performance, which is inclusive of important elements from

otherwise differing perspectives and, thus, allow us to see a greater complexity. The

disclosure of this complexity in firm performance, as it is sketched out in various components

of the business model, enables us to better understand what constitutes a firm‟s sustained


In the following, we describe in further detail how the study of our four supporting research

questions leads us to the main conclusion as just stated above.

Traditional strategic perspectives consider competitive advantage as being ascribed to

external characteristics such as industry forces and choice of generic strategies (I/O), or as

being ascribed to distinctive competencies and resources, giving the firm an edge over

competition (RBV). Both views are criticized for an implicit assumption of static equilibrium

and, hence, a deficiency in addressing the requirements for continued success in a dynamic

environment. The business model literature offers insights which accommodate for these

limitations, as it is recognized that a dynamic attitude is important. This entails the constant

experimentation with the firm‟s business model to ensure that fundamental improvements are

installed when competition threatens. Furthermore, an openness towards ideas and technology

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from the outside can have great impact on performance, just as the willingness to let

information from the firm flow to the outside. Other contributions from the business model

literature add to the discussion about competitive advantage. First of all, the business model is

conceptualized as a promising integrator of disparate views on strategy, namely the I/O and

the RBV. Whereas the I/O school of thought is based on the assumptions, that resources in an

industry are homogeneous (Porter, 1981) the RBV is based on the assumptions that firms are

fundamentally heterogeneous regarding their resources and internal competencies. (Barney,

1991; Hamel & Prahalad, 1994). Nevertheless, business model proposals are presented

including Porter‟s value chain and competitive positioning as well as resources and

competencies. As an overall point, what in the literature has been known as the value network

seems to portray the linkages between firm resources and the environment, as the value

network includes not only the firm itself, but also the collaboration with partners, suppliers,

and customers. These various elements have an impact on creating and sustaining competitive

advantage, and are called “components” in the business model literature. Working with

components permits the testing and modeling of a business and makes it possible to pull apart

aspects of the firm in order to look more closely at the fundamental functions required for

differentiation from competition and successfulness.

With these theoretical insights it is possible to propose a business model which integrates

components from the different perspectives and functions as a unit of analysis to evaluate

competitive advantage. However, this naturally increases the complexity as the focus will

change to a wider scope of analysis, i.e. the whole value network of suppliers, partners, and

customers. When looking to explain the sustainability of competitive advantage, it is not

sufficient to look either at the firm‟s generic strategy or to focus explicitly on internal

resources or core competences. Hence, the degree of strategic fit is evaluated. The fit depends

upon the competitive advantages held by the firm but it also depends on the degree to which

the various components of the business model are coupled. Accordingly, a firm‟s performance

is dependent upon this integration between strategy and business model. In addition, the

sustainability of competitive advantage requires an outstanding strategic fit, which means that

firm‟s must have both high competitive advantages and a strong coupling of components in

the business model. The relation between competitive advantage and the coupling of business

model components as just described was tested empirically on the Irish airline company

Ryanair. This was done by first evaluating the firm‟s competitive advantages cf. the

traditional strategic perspectives, then by analyzing the firm‟s value network, openness and

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ability to change and experiment, and then a final test was made to determine the

sustainability of competitive advantage according to the method set out above.

5.2 Discussion of Findings and Directions for Further Research

This thesis argues that integrating traditional strategic perspectives on sustained competitive

advantage with literature on business models allows for an evaluation of firm performance

which is inclusive of important elements from otherwise differing approaches to the subject;

and, furthermore, that this allows us to reveal a greater complexity than when applying

insights that look solely at e.g. external factors (I/O) or firm specific attributes (RBV). At the

same time, however, this “greater complexity” can also be a source of increased confusion as

to whether it is possible to state a generalization of what leads to competitive advantage.

When so many different factors are taken into account, it can be difficult to pinpoint which of

these are the actual determining causes. Furthermore, the airline industry – as most other

industries - is highly dynamic and the rules of the game change quickly when regulation is

altered or when new technology, sales techniques, booking methods, and other features are

introduced.

The hypothesis presented in this thesis was that a strategic fit is required for a firm‟s business

model to lead to sustained competitive advantage and our case study of Ryanair confirmed

this assertion. The case study gave strong indications that components included in our

business model proposition are key to the firm‟s competitive advantage. However, as stated in

our research philosophy a verification of a hypothesis is not enough to confirm it. This does

not mean that we can determine how many case studies, which would all confirm our

proposition, should be carried out in order to turn our hypothesis into objective knowledge.

But it does mean that repeated experiments would be interesting in order to strengthen our

“qualified guess” of what leads to sustained competitive advantage. The purpose of these

repeated experiments, however, would not be verification as such, but the falsification of the

hypothesis or parts thereof, so that enhancements could continuously be made to the

underlying assumptions. Direct replications of the Ryanair case study could be carried out

with firms that are industry leaders in other sectors in order to see if the results would differ.

Also, case studies of underperformers in the same industry (airline) would be interesting, as

they would provide alternative perspectives on the conclusions drawn here.

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KOLLEWE, J., 18 December 2009, Ryanair scraps Boeing order for 200 planes [Homepage of

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LEA, R., 5 February 2009, Ryanair boss keeps losing by hedging his bets on oil price [Homepage of London Evening Standard], [Online]. Available: http://www.thisislondon. co.uk/standard-business/article-23634924-Ryanair-boss-keeps-losing-by-hedging-his-bets-on-oil-price.do [14 March, 2010].

LEARMOUNT, D., 5 June 2006, Time to change? Pilots at Europe's fast-growing low-cost carriers are flying more and facing different pressures. [Homepage of Airline Business], [Online]. Available: http://www.flightglobal.com/articles/2006/06/05/206998/time-to-change-pilots-at-europes-fast-growing-low-cost-carriers-are-flying-more-and-facing.html [25 March, 2010].

MAIER, M., 31 March 2006, A radical fix for airlines: Make flying free [Homepage of Business 2.0 Magazine], [Online]. Available: http://money.cnn.com/magazines/ business2/business2_archive/2006/04/01/8372814/index.htm [27 March, 2010].

MCGINN, D., 2004. Is This Any Way to Run An Airline? Newsweek, 144(14), E14-E24.

MORRISON, M. and LEARMOUNT, D., 11 April 2007, Ryanair boss Michael O’Leary plans launch of transatlantic no-frills airline with fleet of 50 Airbus A350s or Boeing 787s [Homepage of Flight International], [Online]. Available: http://www.flightglobal. com/articles/2007/04/11/213208/Ryanair-boss-michael-oleary-plans-launch-of-transatl antic -no-frills-airline-with-fleet-of-50.html [28 March, 2010].

http://www.centreforaviation.com/news/share-market/2010/02/01/more-potential-challenges-for-airbus-and-boeing---embraer-studying-150-seater/page1

http://www.centreforaviation.com/news/share-market/2010/02/01/more-potential-challenges-for-airbus-and-boeing---embraer-studying-150-seater/page1

http://www.businessweek.com/magazine/content/01_20/b3732016.htm

http://www.travolution.co.uk/articles/2010/02/16/3260%20/Ryanair-and-expedia-settle-out-of-court.html

http://www.travolution.co.uk/articles/2010/02/16/3260%20/Ryanair-and-expedia-settle-out-of-court.html

http://www.flightglobal.com/articles/2009/02/19/322650/fuel-hedging.html

http://www.airways.ch/files/1000/2006/0706/001/capaairportsecrets%20.htm

http://www.flightglobal.com/articles/2009/%2004/24/325543/airlines-deepen-ties-with-outsourcing-partners.html

http://www.flightglobal.com/articles/2009/%2004/24/325543/airlines-deepen-ties-with-outsourcing-partners.html

http://www.guardian.co.uk/business/2009/dec/18%20/Ryanair-boeing-talks-aircraft

http://www.guardian.co.uk/business/2009/dec/18%20/Ryanair-boeing-talks-aircraft

http://www.flightglobal.com/articles/2006/06/05/206998/time-to-change-pilots-at-europes-fast-growing-low-cost-carriers-are-flying-more-and-facing.html

http://www.flightglobal.com/articles/2006/06/05/206998/time-to-change-pilots-at-europes-fast-growing-low-cost-carriers-are-flying-more-and-facing.html

http://money.cnn.com/magazines/%20business2/business2_archive/2006/04/01/8372814/index.htm

http://money.cnn.com/magazines/%20business2/business2_archive/2006/04/01/8372814/index.htm

104

MORRISON, M., LEARMOUNT, D. and TURNER, A., 17 April 2007, Ryanair sets out long-haul plans

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RAY, A., 2003. Reaching new destinations. New Media Age, 18-20.

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ROBERTSON, D., 3 February 2009, Fuel-hedging "screw up" costs Ryanair dear [Homepage of Times Online], [Online]. Available: http://business.timesonline. co.uk/tol/business/industry_sectors/transport/article5645152.ece [13 March, 2010].

RYANAIR, 9 July 2009, News Release: Free flight - would you stand? [Homepage of Ryanair Ltd.], [Online]. Available: http://www.Ryanair.com/en/news/free-flight-would-you-stand [15 March, 2010].

RYANAIR, 10 February 2009, News Release: New partnership with camping specialist Alan Rogers Travel [Homepage of Ryanair Ltd.], [Online]. Available: http://www .Ryanair.com/en/news/new-partnership-with-camping-specialist-alan-rogers-travel [8 March, 2010].

RYANAIR, 16 February 2010, News Release: New partnership with Costa Cruises [Homepage of Ryanair Ltd.], [Online]. Available: http://www.Ryanair.com/en/news/new-partnership-with-costa-cruises [25 March, 2010].

RYANAIR, 22 April 2009, News Release: One in three Ryanair passengers vote for 'Fat Tax'

[Homepage of Ryanair Ltd.], [Online]. Available: http://www.Ryanair.com/en/news/one-in-three-Ryanair-passengers-vote-for-fat-tax [15 March, 2010].

RYANAIR, 12 March 2009, News Release: Passengers to suggest next discretionary charge [Homepage of Ryanair Ltd.], [Online]. Available: http://www.Ryanair.com/en/news /passengers-to-suggest-next-discretionary-charge [15 March, 2010].

RYANAIR, 4 June 2009, News Release: Ryanair and AXA Travel Insurance to offer great value insurance cover [Homepage of Ryanair Ltd.], [Online]. Available: http://www.Ryanair.com/hr/news/Ryanair-and-axa-travel-insurance-to-offer-great-value-insurance-cover [25 March, 2010].

RYANAIR, 14 April 2009, News Release: Ryanair and Hertz Extend Car Hire Partnership [Homepage

of Ryanair Ltd.], [Online]. Available: http://www.Ryanair.com/no/news/ Ryanair-and-hertz-extend-car-hire-partnership [7 March, 2010].

RYANAIR, 18 December 2009, News Release: Ryanair confirms Boeing negotiations have terminated unsuccessfully [Homepage of Ryanair Ltd.], [Online]. Available: http://www.Ryanair.com/en/news/Ryanair-confirms-boeing-negotiations-have-terminated-unsuccessfully [25 March, 2010].

RYANAIR, 1 November 2006, News Release: Ryanair launches online bingo & gaming partnership with Jackpot Joy [Homepage of Ryanair Ltd.], [Online]. Available: http://www.Ryanair.com/en/news/gen-en-011106 [8 March, 2010].

http://www.ttglive.com/

http://www.flightglobal.com/articles/2008/08/20/314880/hedge-your-bets.html

http://www.ryanair.com/en/news/free-flight-would-you-stand

http://www.ryanair.com/en/news/new-partnership-with-costa-cruises

http://www.ryanair.com/en/news/new-partnership-with-costa-cruises

http://www.ryanair.com/en/news/one-in-three-ryanair-passengers-vote-for-fat-tax

http://www.ryanair.com/en/news/one-in-three-ryanair-passengers-vote-for-fat-tax

http://www.ryanair.com/en/news%20/passengers-to-suggest-next-discretionary-charge

http://www.ryanair.com/en/news%20/passengers-to-suggest-next-discretionary-charge

http://www.ryanair.com/hr/news/ryanair-and-axa-travel-insurance-to-offer-great-value-insurance-cover

http://www.ryanair.com/hr/news/ryanair-and-axa-travel-insurance-to-offer-great-value-insurance-cover

http://www.ryanair.com/no/news/%20Ryanair-and-hertz-extend-car-hire-partnership

http://www.ryanair.com/no/news/%20Ryanair-and-hertz-extend-car-hire-partnership

http://www.ryanair.com/en/news/ryanair-confirms-boeing-negotiations-have-terminated-unsuccessfully

http://www.ryanair.com/en/news/ryanair-confirms-boeing-negotiations-have-terminated-unsuccessfully

http://www.ryanair.com/en/news/gen-en-011106

105

RYANAIR, 12 January 2010, News Release: Ryanair signs deal with Perfect Getaways [Homepage

of Ryanair Ltd.], [Online]. Available: http://www.Ryanair.com/en/news /Ryanair-signs-deal-with-perfect-getaways [25 March, 2010].

RYANAIR, 14 October 2008, News Release: Ryanair terminates Expedia Hotel Deal [Homepage of Ryanair Ltd.], [Online]. Available: http://www.Ryanair.com/en/news/gen-en-141008-3 [7 March, 2010].

SANDLE, P., 18 December 2009, UPDATE 1-Ryanair hopes to order 200 aircraft by year-end [Homepage of Reuters], [Online]. Available: http://www.reuters.com/article /idUSLD64846820091013 [25 March, 2010].

SCHONLAND, A., 14 October 2009, The 200 plane desire [Homepage of Gehrson Lehrman Group], [Online]. Available: http://www.glgroup.com/News/The-200-plane-desire-44116.html [25 March, 2010].

THOMSON, R., 8 January 2008, Ryanair signs deal for onboard sales technology [Homepage of ComputerWeekly.com], [Online]. Available: http://www.computerweekly.

com/Articles/2008/01/08/228795/Ryanair-signs-deal-for-onboard-sales-technology.htm [28 March, 2010].

WILLIAMSON, A., 26 May 2008, An 'open source' model airline - Ryanair [Homepage of Alan Williamson], [Online]. Available: http://alan.blog-city.com/Ryanair.htm [28 March, 2010].

6.4 Other Online Resources

BILLION DOLLAR INCOME, Meaning of the Color Yellow. Available: http://www.billiondo llarincome.com/meaning-of-the-color-yellow.html [7 April, 2010].

BOEING, Boeing: Commercial Airplanes - 737 - About the 737 Family. Available: http://www.boeing.com/commercial/737family/background.html [18 March, 2010].

BRITISH AIRWAYS, Executive Club - Welcome - British Airways. Available: http://www .britishairways.com/travel/echome/public/en_gb [18 March, 2010].

EASYJET, easyJet.com. Available: http://www.easyjet.com/asp/da/Bestil/index.asp? lang=da [18 March, 2010].

EUROCHEAPO, Ryanair flights - cheap flights in Europe. Available: http://www.eurocheapo .com/flights/carriers/Ryanair.html [27 March, 2010].

EUROSTAR, Eurostar: Tickets, Bookings, Timetables, fares and offers. Available: http://www.eurostar.com/dynamic/index.jsp [18 March, 2010].

GOAIR, GoAir. Available: http://www.goair.in/index.asp [18 March, 2010].

KLM, KLM Royal Dutch Airlines - KLM.com. Available: http://www.klm.com/travel/nl _nl/index.htm [18 March, 2010].

MOMONDO, Momondo - Cheap flights - Travel Search Engine for low cost and cheap airline tickets. Available: http://www.momondo.com/ [18 March, 2010].

RYANAIR, About Us - Passenger Charter. Available: http://www.Ryanair.com/da/about /passenger-charter [18 March, 2010].

RYANAIR LTD., About Us. Available: http://www.Ryanair.com/da/about [8 March, 2010].

http://www.ryanair.com/en/news%20/Ryanair-signs-deal-with-perfect-getaways

http://www.ryanair.com/en/news%20/Ryanair-signs-deal-with-perfect-getaways

http://www.ryanair.com/en/news/gen-en-141008-3

http://www.reuters.com/article%20/idUSLD64846820091013

http://www.reuters.com/article%20/idUSLD64846820091013

http://www.glgroup.com/News/The-200-plane-desire-44116.html

http://alan.blog-city.com/ryanair.htm

http://www.boeing.com/commercial/737family/background.html

http://www.easyjet.com/asp/da/Bestil/index.asp?%20lang=da

http://www.eurostar.com/dynamic/index.jsp

http://www.goair.in/index.asp

http://www.klm.com/travel/nl%20_nl/index.htm

http://www.momondo.com/

http://www.ryanair.com/da/about%20/passenger-charter

http://www.ryanair.com/da/about%20/passenger-charter

http://www.ryanair.com/da/about

106

RYANAIR LTD., Cheap Flights - Travel to European destinations - Cheap Flights from Denmark. Available: http://www.Ryanair.com/da/cheap-flight-destinations [8 March, 2010].

SAS, EuroBonus - SAS. Available: http://www.flysas.com/en/EuroBonus/?vst=true [18 March, 2010].

SUPERSAVER, Location-Based Marketing & Mobile Advertising. Available: http://www.supersaver.com/ [18 March, 2010].

TGV, Rail Europe > TGV. Available: http://www.tgv.co.uk/ [18 March, 2010].

VIRGIN, Virgin Atlantic Airways - Company - Virgin. Available: http://www.virgin.com/ company/virgin-atlantic-airways/ [18 March, 2010].

6.5 Interviews Pedersen, J. (2010) Appendix 4 Transcription of the Interview with Jacob Pedersen, CFA senior

analyst from Sydbank. [Phone Interview]. Copenhagen- Aabenraa . Caroline Ramos Korsaa &

Lisbet Røge Jensen. June, 14.

Hvid, P. (2010) Appendix 5 Transcription of the Interview with Per Hvid, Head of foreign equities

from Svenska Handelsbanken. [Phone Interview]. Copenhagen-Herning. Caroline Ramos Korsaa &


Gill, J. (2010) Appendix 6 Transcription of the Interview with Joe Gill, Director of Equity Research

with Bloxham Stockbrokers. [Phone Interview]. Copenhagen – Dublin. Caroline Ramos Korsaa &


http://www.ryanair.com/da/cheap-flight-destinations

http://www.flysas.com/en/EuroBonus/?vst=true

http://www.supersaver.com/

http://www.tgv.co.uk/

http://www.virgin.com/%20company/virgin-atlantic-airways/

http://www.virgin.com/%20company/virgin-atlantic-airways/

7. Appendices

Appendix 1: Overview of Ryanair’s Partners

Partners1

Product delivered cf.

Ryanair website Type of Partnership Available contract information

Hertz Cheap Car Hire

Hertz is exclusive car rental partner of Ryanair.

Partnership “designed to deliver ultimate car

hire convenience to Ryanair customers”2.

Includes an integrated online booking system

and exclusive special offers.

Partnership began 19983. Current agreement running to 2014.

Hertz pays per passenger fee to Ryanair for sole rights to

market car hire services via airline website. Deal generated

€25.2m for Ryanair in FY2007-84.

Booking.com

Cheap Hotels

Customers can book hotels via Ryanairs website

with a choice of Booking.com‟s more than

57,000 hotels, as they are directed to a Ryanair-

Booking.com branded microsite, which includes

the same functionality as the hotel reservation

company‟s main site.

5 year exclusive partnership, announced in January 2009.

Booking.com pays “a fee” to Ryanair for handling hotel

services5.

Hostelworld.com

Hostels and B&Bs

Provides hostel, B&B, and guesthouse deals to

passengers through Ryanair‟s website.

Partnership initiated in 2003 and renewed in 2007. Exclusive

five year deal, with the aim to “drive down the cost of travel

for millions of European consumers”6. In the years 2003-2007

the partnership generated Hostelworld.com business worth

more than €28m, and this amount is expected to increase as

passenger numbers with Ryanair increase7.

Perfect Getaways Ltd.

Villas & Apartments:

Ryanair Lettings

Co-branded microsite which offer access to the

holiday home search engine for self-catering

accommodation, i.e. private letters of villas,

apartments etc.

“Ryanair gives owners access to over 73 million passengers

looking to purchase holiday accommodation in the area they

are flying to”8.

108

AXA Travel Insurance

Ryanair Travel Insurance

The partnership offers passengers access to “a

competitively priced, tailor-made travel

insurance product”. Insurances available are

single-trip, multi-trip and annual travel

insurance policies.9

Five-year partnership commencing 2009. No financial terms

of the deal disclosed. Previous partner was Mondial

Assistance Group (2003-2009). Product is restricted to

citizens of certain countries.

MBNA and Santander

Cards UK Limited (GE

Capital Bank)

Ryanair Credit Card

Co-branded Mastercards available to citizens of

some countries. Earns the passenger bonus on

flights, savings on booking fees, and other

rewards and benefits. Sold via website, on-

board, and via direct marketing at airports.

Initially a partnerships with GE Money, which is now

acquired by Santander Cards UK. Ryanair generates revenue

from the card issuers on the basis of number of cards issued

and revenues generated through use of the cards10

.

Costa Cruises Cruise Holidays

Ryanair passengers book cruises directly via the

airlines website. Of Ryanair‟s routes, 50 are

connected to port destinations offered by Costa

Cruises.

Exclusive cruise partnership initiated 2008 in which Costa

Cruises handles all cruise bookings made via the airlines

website and pays Ryanair a per passenger fee11

. Ryanair aims

to reduce their passenger‟s cost of traditionally expensive

cruise holidays, while Costa Cruises expand their potential

customer base substantially.12

Jackpotjoy.com Get £100 Free! Online gaming

Initiated 2006. The partnership enables Jackpotjoy.com to

reach millions of customers through Ryanair.com, while the

aim for Ryanair is for the partnership to assist in leveraging

the margin in offering the lowest fares of any airline in

Europe.13

SHUTTLEDIRECT /

Viajes Alameda, s.a.

Airport Transfer

(Private Transfers)

Booking of airport transfer via Ryanair.com

microsites. Also sold onboard.

N/a

Terravision

Airport Transfer

(Airport Coach)

Hispano Igualadina Airport Transfer

(Reus Airport Bus)

109

Stansted Express /

London Eastern Railway

Limited

Airport Transfer

(Stansted Train)

Alan Rogers Guides Ltd. Campsite Holidays

Ryanair passengers can book campsites via the

“Ryanair camping” microsite. Also features

exclusive Ryanair offers.

The partnership, which was announced in February 2009,

“will lower the cost of camping for millions of European

consumers by forcing high-price camping operators to cut

prices to compete with [Alan Rogers] and Ryanair"14

.

BCP Airport Parking,

Airport Lounges

Passengers enjoy discounted airport parking and

access to airport lounges.

Ryanair customers save up to 60% when pre-booking via

Ryanair.com

Arrivalguides.com Free City Guides

Tourist guides to download for free from the

Ryanair website.

N/a

Ink Publishing Inflight Magazine

Brandforce Marketing Scratch Cards

OnAir / SITA Mobiles on Board

In-flight communications service, which allows

passengers to use mobile phones and other

electronic equipment.

Ryanair pays a one-off fee to On Air and bears the cost of

installation on the aircraft. The aircraft then receives

commissions on mobile calls, text messages and emails sent

and paid for by passengers.

Buy As You Fly Online shopping

AD2ONE Global advertising http://www.Ryanair.com/en/news/Ryanair-

website-targets-advertising-partners

Various/Ground Service

Providers Baggage handling

Ryanair‟s ground service providers at all

airports levy and collect excess baggage charges.

Ground service providers are paid by incentive for the excess

baggage they charge in accordance with Ryanair‟s terms and

conditions15

.

1 Ryanair Ltd., https://www.ryanair.com/en. [Accessed March 2010. All information from this site unless

otherwise noted]. 2 Ryanair Ltd., 2009. Ryanair And Hertz Extend Car Hire Partnership; Hertz's Ryanair Bookings Grow 70% In

Last 4 Years. Press release via M2 PressWIRE. 14 april. 3 ibid

4 Mulligan, J., 2009. Exclusive Ryanair-Hertz deal is extended. The Belfast Telegraph, 15 April. p.30,31.

5 Ryanair Ltd. Annual Report 2009. [Online] Available at: http://www.ryanair.com/en/investor/download/2009

[Accessed 13 March 2010]. 6 Ryanair Collaborates with Hostelworld.com, Travel Business Review, 30 August 2007.

7 ibid

8 Ryanair Ltd., 2010. Ryanair signs deal with perfect getaways ADVERTISE YOUR HOLIDAY HOME on

Ryanair.com. Press release via M2 PressWIRE, 12 January. 9 Ryanair Ltd., 2009. Ryanair and AXA Travel Insurance to offer great value insurance cover. Press release via

M2 PressWIRE, 4 June. 10

Ryanair Ltd. Annual Report 2009. [Online] Available at: http://www.ryanair.com/en/investor/download/2009

[Accessed 13 March 2010]. 11

Ibid. 12

Ryanair Ltd., 2009. Ryanair Announces New Partnership With Costa Cruises - Europe's Number One Cruise

Company. Press release via M2 PressWIRE, 16 February. 13

Ryanair Ltd., 2006. Ryanair launches online bingo & gaming partnership with Jackpot Joy. Ryanair.com

[internet]. 1 November. Available at: http://www.ryanair.com/en/news/gen-en-011106. [Accessed 8 March

2010]. 14

Ryanair Ltd., 2009. Ryanair Announces New Partnership With Camping Specialist Alan Rogers Travel. Press

release via M2 PressWIRE, 10 February. 15

Ryanair Ltd. Annual Report 2009. [Online] Available at: http://www.ryanair.com/en/investor/download/2009

[Accessed 13 March 2010].

111

Appendix 2: Ryanair’s Website

112

Appendix 3: Interview Guide

Date:

Company name:

Name and position of the interviewed:

Sustained Competitive Advantage:

Would you argue, that Ryanair has managed to create and sustain a competitive position since

their re-launch as Europe‟s first low fares airline in 1990?

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

Industry Structure

1. How would you assess the degree of rivalry within the airline industry ?

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

2. How would you assess the likelihood of new entrants for this industry ?

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

3. Do Ryanair‟s main suppliers (e.g. Boeing, fuel suppliers, airports) have a high or low

bargaining power?

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

113

4. Do Ryanair‟s customers (B2B and B2C) have a high or low bargaining power?

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

5. How strong do you consider the threat of substitutes (e.g. road, rail, marine) for Ryanair?

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

Generic strategies

1. In relation to Porter‟s generic strategies i.e. Cost leadership, Differentiation or Focus,

Ryanair has chosen to pursue the strategy of cost leadership and thus managed to

differentiate itself from competitors.

a. How has Ryanair managed to sustain their position as Europe‟s lowest cost airline

in spite of the increase in competition?

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

Resources

1. If we define Ryanair‟s physical resources as e.g. plant and equipment, geographic

location, access to raw materials etc.: Could you mention physical resources of Ryanair,

which are valuable, rare, difficult to imitate, difficult to substitute?

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

114

2. Concerning Ryanair‟s human resources, i.e. intangible assets include the training,

experience, judgment, intelligence, relationships, and insight of individual managers and

workers in the firm: Could you mention human resources in the company, which are

valuable, rare, difficult to imitate, difficult to substitute?

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

3. Concerning Ryanairs Financial resources, how big a role would you argue that the Ryan

family‟s financial resources have played in Ryanair‟s ability to pursue their competitive

position as Europe‟s lowest cost airline?

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

Core competence

1. Does Ryanair possess a core competence (a core competence is the collective learning in

the organization, especially the coordination of production skills and the integration of

technologies)?

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

2. If yes, could you describe, what Ryanair‟s core competence is?

___________________________________________________________________________

___________________________________________________________________________

115

___________________________________________________________________________

Continuity

Porter (2001) argues that frequent corporate “reinvention” often is a sign of bad strategic

thinking and will most likely lead to failure.

1. Has Ryanair changed business strategy since its foundation?

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

2. If yes, when did Ryanair change strategy? And for how many years did Ryanair keep the

same strategy?

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

3. Would you argue that Ryanair has managed to establish and preserve a difference from its

rivals, which has allowed the company to outperform competitors?

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

4. Does Ryanair reconsider its strategy?

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

116

Value Network

The application of firm specific core competencies, resources, and positional advantages are

argued to create unique relationships in a value network. Furthermore, when these

competencies and resources are considered as a bundle, as opposed to on their own, they

become harder to imitate, harder to transfer and more complementary. Accordingly, they

contribute substantially to the company‟s competitive advantage.

1. Does Ryanair‟s relationship with suppliers contribute positively to Ryanair‟s low-cost

strategy?

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

2. Do they share knowledge with suppliers?

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

3. Is Ryanair highly dependent on suppliers and are suppliers dependent on Ryanair?

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

4. Does Ryanair share business risks with suppliers?

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

117

5. Would you agree that Ryanair has an active relationship with both suppliers and partners,

and constantly works to obtain the most cost-effective agreements?

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

6. Does Ryanair‟s relationship with its business partners facilitate the airline‟s putting a

price on everything other than the actual flight ticket?

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

7. Does Ryanair change business partners often?

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

8. Does Ryanair share business risks with partners?

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

9. Do Ryanair‟s customers play an active role in the cost cutting strategy?

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

118

10. Does Ryanair interact with customers and how do they do this?

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

11. Does Ryanair listen to customers? If yes how?

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

12. Does Ryanair‟s customers provide valuable knowledge to the company?

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

13. Do you think, that Ryanair‟s relationship with customers needs to change eventually

towards a more “caring and sharing” company?

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

119

Appendix 4: Transcription of Interview with

Jacob Pedersen, CFA senior analyst from Sydbank/Denmark

Date: June 14, 2010

___________________________________________________________________________

Company name:

Sydbank

Kapitalforvaltning

Peberlyk 4

DK-6200 Aabenraa

___________________________________________________________________________


Jacob Pedersen, CFA senior analyst

___________________________________________________________________________


Would you argue, that Ryanair has managed to create and sustain a competitive position

since their re-launch as Europe‟s first low fares airline in 1990?

Absolutely, moreover they have managed to develop and improve their position through the

years. They have found a new niche as they today deliver a product which is highly demanded

in the market. Their business model is streamlined, where their point-to-point strategy plays

an important role to this end.

Industry Structure


Competition in the airline industry is extremely tough. One problem is, that it is very easy to

get access to aircraft. Especially leasing aircraft is a cheap and easy way to enter the industry,

thus attracting many new entrants.

120


Entry barriers are low especially for point-to-point. Especially good periods are characterized

with over-investment which ruins the markets many years in advance.


bargaining power?

They have a low bargaining power. Ryanair has the absolute power because they purchase big

volume. Ryanair make money and buy when others cannot afford to. Airports crave for

aircraft. The new terminal Swift in Copenhagen Airport, is a way to attract low-cost airlines

like Ryanair.


Generally,I would argue that customers do not have much to say. If you want to be carried

this way, this is how it is. Due to their low costs Ryanair have a high bargaining power.

Moreover, Ryanair cannot cover the entire market. It is the cheapest part of the market that

they cover which is especially B2C customers. I don‟t see that B2B customers would chose

Ryanair. In this way, Ryanair cover their customer‟s needs, which is delivering the lowest

prices.


Since Ryanair is so cheap they make a little threat. Ryanairs choice of secondary airports

among other things makes it possible to lower prices. However, their pricing structure is

rather complex and the price they advertise is not reliable, as they inform exactly what they

have to and nothing more. Extra fees are not included in the advertised prices and can

therefore come as a surprise when you have to pay.

Generic strategies






Firstly, the ability to keep their costs lower than competitors. Secondly, their ability to market

themselves with such a great success. Ryanair‟s volume in terms of passengers and revenue

cannot be matched by any competitor. Ryanair simply fly with the lowest costs and that it

difficult to beat. Ryanair are the cheapest, so if you want the cheapest you go with Ryanair.

121

Resources




Well, their young fleet of standard aircraft gives Ryanair great flexibility in terms of

personnel and so on. Ryanair is already the most profitable airline. They buy their aircraft

when they are cheapest – when the order books are small at Boeing.





O‟Leary‟s rhetoric has created the successful airline. It is always a pleasure to read Ryanair‟s

accounts. He is so straightforward and says it as it is. That definitely creates an identity in the

organization, to have a manager who speaks up and demands everybody to do what he

demands – whether it is the employees or governments. However, the employees are not

treated very well.




Of course at the outset it had an importance what they had to enter with in terms of cash.

However, it is to a great extent their business model which is unique. They could have leased

aircraft cheaper. It is their streamlined business and O‟Leary which is their main reason for

their competitive position.

122

Core competence



technologies)?

Well, Ryanair carries their customers cheaper than their competitors because they have the

competencies to do this. They have a fast turnaround which involves complex processes to

succeed in order to get it all to work out. Ryanair has invented a concept which can be rolled

out and where O‟Leary is the figurehead.

Continuity




No, low cost is the concept since the beginning

6. Would you argue that Ryanair has managed to establish and preserve a difference from

its rivals, which has allowed the company to outperform competitors?

Yes


No, it would be unwise to reconsider its strategy. Moreover, Ryanair should stick to their

short-haul routes. Long distance flights does not fit into Ryanair‟s way of doing things.

Value Network






123


strategy?

Yes, of course they do. Ryanair is dependent upon the cost levels. The only thing, that

Ryanair does not have the power over is the oil price.


I don‟t know.


Suppliers are more dependent upon Ryanair than reverse.


I don‟t know



Absolutely, they are always looking for new ways to keep prices low. You have to work hard

to get it.


price on everything

other than the actual flight ticket?

Yes


I don‟t know how often, but they will not hesitate to change if they get a better offer.


As said before, Ryanair has the upper hand in their relationship to partners and suppliers.


They are the ones deciding to fly with Ryanair.


I don‟t know


124

I think, that when the customers have got used to the way it works. They accept the terms and

return.


As long as tickets are bought it indicates that customers are satisfied.



I don‟t think so. In that case it would come as customers would stay away. This would be

observed from month to month. I think that when customers are used to the way it works, they

accept it. Ryanair has a strong business concept which will work in many years ahead.

125


Per Hvid, Head of Foreign Equities from Svenska Handelsbanken/Denmark

Date: 14. June, 2010

Company name:

Svenska Handelsbanken

Østergade 2

7400 Herning

Danmark


Per Hvid, Head of Foreign Equities




Yes, absolutely

Industry Structure


Competition is cutthroat. Ryanair‟s advantage is that they do not have a huge service

machinery. SAS and others have many expenses i comparison. Også their expenses to salaries

are lower than their competitors. Moreover, Ryanair do not make agreements with labor

unions and other collective associations. Accordingly, they save a lot of money compared to

their competitors.


Many new airlines have appeared during the last couple of years. However, many have gone

under again. Earlier, before the liberalization of the industry, there was a monopoly situation,

where SAS was the big player. Today competition is very fears and SAS is becoming the

looser.

126


bargaining power?

Maybe they have a higher bargaining power today especially Boeing, since they are the only

supplier of aircraft. They are much more dependent on Boeing today, since it would be very

costly to change supplier and getting spare parts. However, Boeing is also very dependent

upon Ryanair as they are their biggest customer.


Customers have become very disloyal. Price is the offsetting factor, so the customer has

become less demanding. Nevertheless, I would never fly with Ryanair again. I tried it once

and it was a very bad experience.


I don‟t see the substitutes for flying with Ryanair as any threat. It is so cheap to fly, that

choosing another way of transport is due to other reasons than the price.

Generic strategies






Due to their ability to save money and not having a huge service machinery.

Resources




Their geographic location. Ryanair add a lot of traffic to airports and they even receive public

support. An example is the Danish airport. On one hand, these practices distort competition,

as other airlines cannot compete on the same conditions. On the other hand, customers benefit

as they can deliver the lowest prices in the market.

127





O‟Leary is a very strong personality, who invades the turfs of authorities and everybody else.

In terms of policy, he is very aggressive. Everybody has to obey his orders. The other

employees are thus not as admired as employees in other airlines.




I don‟t know.

Core competence



technologies)?

O‟Leary can decide everything. In comparison to conventional airlines, who‟s processes is a

drag on them. Compared to other low cost airlines, they definitely have a core competence –

they can do something which others cannot.


Ibid.

Continuity




Low cost is the concept, which they have had all along.

128


same strategy?

(Not relevant)



Yes, definitely. As said before they are better than their competitors.


No

Value Network







strategy?

Yes, but Ryanair demands what will happen in most cases. However, when Ryanair wanted

to implement payment for going to the toilet on the aircraft, Boeing refused to implement it.

But in general, you can compare Ryanair with Walmart in terms of their strategy. They make

big orders and thereby their bargaining power is big.


I don‟t know.


Ryanair is not as dependent as the suppliers. Boeing might be the exception.


I don‟t know

129



Yes, definitely.


price on everything


Yes


They go for the best deal in order to get the lowest cost.


Don‟t know


Ryanair‟s customers are primary retired people or young people, who only care about the

price. I would argue that using secondary airports should have a negative effect on the

company, but this is how they can sustain their low costs.


(Not discussed)


As long as the concept works and customers return there is no need to listen too much.


(Not discussed)



Perhaps there will come a time when they have to change, but right now they should not. At a

point, customers might have had enough of Ryanair‟s way of doing things and then they need

to listen and change accordingly.

130


Joe Gill, Director of Equity Research with Bloxham Stockbrokers/Ireland

Date: 16. June, 2010

Company name:

Bloxham Stockbrokers

2/3 Exchange Place

IFSC, Dublin 1

Ireland


Joe Gill, Director of Equity Research




Yes they did, but the sustainability of their competitive position was created through their

constant obtainment of the lowest prices in the market.

Industry Structure


(Not discussed)


(Not discussed)


bargaining power?

(Not discussed)


(Not discussed)

131


(Not discussed)

Generic strategies




a. How has Ryanair managed to sustain their position as Europe’s lowest cost

airline in spite of the increase in competition?

The industry cost is very important. In the case of Ryanair it has been consistent for the past

20 years. They understand how to secure their financials. For example, Ryanair has a broad

range of aircraft at the cheapest price. They make favorable contracts with secondary airports,

and their employees are rewarded thorough productivity rather than on the pay. Ryanair has

the ability to keep their unit costs at industry lows.

Resources



which are valuable, rare, difficult to imitate, difficult to substitute?‟

(Not discussed)





(Not discussed)

132




(Not discussed)

Core competence



technologies)?

I think they do - yes.


Their excellent management team with O‟Leary in the front – they are consistent and do not

compromise in cost cutting. No competitor can match their ability to get the cheapest prices in

the market.

Continuity




No


same strategy?

(Not relevant)



(Answered previously)


133

No they are going to continue with their low cost strategy.

Value Network







strategy?

Yes, Ryanair has a very aggressive approach towards their suppliers and partners. Everybody

has to be prepared to lower prices in order to win a contract with Ryanair


They do share some knowledge, but they are also aware of keeping some matters private.


Suppliers a much more dependent on Ryanair


(Not discussed)



Yes


price on everything


Yes


Not terribly, but they do have regular processes in order to evaluate their partnerships. When

a contract is about to expire, Ryanair reconsiders the terms in order to continuously sustain

the lowest prices. HERTZ is a partner which Ryanair continuous to renew its contract with.

134


Yes, some risks.

Do Ryanair‟s customers play an active role in the cost cutting strategy?

The customers buy the tickets, but they do not play a big role as such for the company. Low

cost is the focus.


They have a customer manager, but customer care is not core for the operation.


They have customer service, but they would not spent too much money on it.


They don‟t spent too much money in creating a relationship with their customers. Focus is on

cost at any time.



Yes I think so. But O‟Leary will not change, that is impossible. It will be when he leaves the

company, then they will have to evolve towards a more caring company. But the strategy will

remain with a focus on low cost.

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